What Commercial Landlords Should Consider Before a New Lease

Entering into a new commercial lease is a significant decision. The terms agreed at the outset will govern the relationship between landlord and tenant for the duration of the lease — and in many cases, for longer if options are exercised.

Tenant quality is the most important consideration. A lease to a well-established, financially sound tenant on reasonable terms is generally preferable to a lease to a less certain tenant on marginally better financial terms. The cost of a tenant default or a prolonged vacancy can significantly outweigh the benefit of a higher rent.

Lease term and options should be considered carefully. Longer terms provide income security but reduce flexibility. Options give the tenant the right to extend — which is valuable to the tenant but limits the landlord's ability to reposition the property or renegotiate terms at market.

Rent review mechanisms determine how the rent will change over the lease term. Common structures include fixed percentage increases, CPI-linked reviews, and market reviews. Each has different implications for income predictability and long-term returns.

Outgoings arrangements — which costs the tenant pays and which the landlord retains — vary significantly between leases. Gross leases, net leases, and hybrid arrangements each have different risk profiles for the landlord.

Fit-out contributions and incentives are common in commercial leasing, particularly in competitive markets. The cost of any incentive should be factored into the effective rent calculation when comparing leasing options.

Lavida advises commercial landlords on leasing strategy and transaction management across Melbourne and Victoria. We are available to discuss any commercial property owner's specific leasing circumstances.