Commercial leases contain terminology that can be unfamiliar for landlords and tenants who don’t manage property every day. Understanding these terms helps with negotiations, compliance, and long-term planning.

Below is a detailed guide to the most commonly used commercial lease terms, explained clearly and without legal jargon.

Core Commercial Lease Terms

1. Make-Good

Make-good defines the condition the tenant must leave the premises in when they vacate.

Common make-good obligations include:

• Basic clean
• Repairing damage
• Repainting of painted surfaces
• Returning the premises to original condition
• Full strip-out of fit-out
• Removal of signage

Why it matters: This is one of the biggest sources of end-of-lease disputes if not defined clearly.

2. Bank Guarantee

A bank guarantee is a financial security issued by the tenant’s bank. It is held by the landlord and can be drawn on if the tenant defaults.

Typical value: 3–6 months of rent + outgoings.

3. Security Bond

An alternative to a bank guarantee, held in trust by the landlord or an authorised body. More common for smaller or shorter-term leases.

4. Fit-Out

Fit-out includes internal construction works, equipment, utilities, partitions, and finishes required for the tenant’s operation.

The lease sets out:

• Who pays
• Ownership at lease end
• Make-good conditions relating to fit-out

5. Lease Incentives

Used to attract tenants and may include:

• Rent-free periods
• Fit-out contributions
• Reduced rent
• Cash incentives

Lease incentives should be clearly documented in an Incentive Deed.

6. Market Rent Review

A clause allowing rent to be reset to current market rates, generally at option renewal.

Key factors:

• Comparable evidence (i.e. nearby properties of a similar size and use)
• Incentives
• Vacancy rates
• Lease terms

7. Option to Renew

A contractual right for the tenant to extend the lease beyond the expiry date of the current term. Lease options must be exercised within a specific timeframe in accordance with the lease.

8. Permitted Use

Specifies how the premises can be used. Any change requires landlord approval and, sometimes, may also require local Council approval.

9. Lease Assignment

If a tenant wants to sell or exit the business before the lease ends, they may transfer the lease (and all the obligations that come with it) to another entity, which is known as a lease assignment.

The landlord has the right to approve or reject the lease assignment based on reasonable grounds.

10. Outgoings

All costs associated with operating and managing the property. These include costs such as water rates, council rates, land tax, management fees, strata levies, and so on.

11. Rent Reviews

In most commercial leases, rent is increased annually. Rent may increase by:

• CPI
• Fixed percentage
• Market review

Additional Terms Landlords Should Understand

Gross vs Net Leases

Gross: The tenant pays a fixed monthly fee that is inclusive of outgoings.
Net: The tenant pays a monthly fee comprising of both rent and outgoings, with the outgoings reconciled annually to compare actual expenditure to budgeted expenditure.

Default and Breach

Outlines what happens if the tenant fails to meet their contractual obligations under the lease.

Why Clear Lease Terms Matter

• Protects the landlord’s asset
• Reduces disputes
• Ensures predictable costs
• Supports long-term compliance

Blackburne works closely with property owners to interpret and manage lease obligations in a way that reduces risk and protects asset value.

FAQs

What’s the most commonly misunderstood term in commercial leases?

Make-good obligations. Many tenants underestimate the costs to properly adhere to these obligations.

Is a bank guarantee better than a bond?

For landlords, typically yes — it provides stronger security because it can’t be withdrawn by the tenant; it remains valid even if the tenant becomes insolvent; and it avoids the trust-account complications that come with holding cash.

Can incentives be recovered?

No, as they are commercial decisions made by the landlord to secure a tenant.

How important are annual rent reviews?
Very. Fixed or CPI-linked reviews support predictable growth in Net Operating Income (NOI) and materially impact long-term asset value.