What Small Business Landlords Should Know Before Leasing Their Property

Leasing your business premises to another business can be both rewarding and risky. On one hand, it offers a steady income stream and makes valuable use of your property. On the other, a poorly structured lease can lead to disputes, costly repairs, or tenants who fail to pay rent. 

Many small business landlords fall into traps simply because they don’t fully understand what leasing a business premises actually means or which laws apply.

This guide explains what you should know before leasing a business premises in Australia. We’ll break down the difference between commercial and retail leases, common legal issues to watch for, and how to protect your interests through practical planning and legal clarity. Let’s get started. 

Understanding the implications of leasing a business premises to another business

When you lease a business premises, you (the landlord) grant another business (the tenant) the right to use your property for commercial purposes in exchange for rent. While residential tenancies focus on consumer protection, business leases are governed by commercial or retail tenancy laws.

For landlords, this means the relationship is more contractual and negotiable. You can set terms about rent, maintenance, and use. However, you also need to make sure that the terms comply with state or territory law, especially if the tenant uses your premises for retail trading.

Commercial vs retail leases – Why the difference matters for landlords

There are several types of leases available for businesses. As a landlord, one primary distinction you need to understand is between a commercial and a retail lease. The type directly affects what you can and can’t put in the contract and the protections afforded to your tenants. 

What is a commercial lease?

A commercial lease applies when the premises are used for general business purposes. This could include offices, warehouses, factories, or storage facilities. These leases offer considerable contractual freedom, so you and your tenant can negotiate nearly all terms.

There are typically fewer statutory protections for tenants and fewer restrictions on landlords. However, this freedom also means that if you don’t have a clear lease agreement, disputes can arise later, particularly over repairs, rent reviews, or termination rights.

What is a retail lease?

A retail lease applies when the premises are used for retail operations. Think shops, cafes, beauty salons, or service providers operating within retail centres. Specific state and territory legislation covers retail leases, such as the Retail Leases Act 1994 (NSW) or Retail Leases Act 2003 (VIC).

These laws require landlords to follow strict disclosure rules, limit certain clauses (like passing on land tax), and set specific procedures for rent reviews or lease termination. A retail lease means extra compliance but also more transparency for your tenants. 

How to tell which lease regime applies

The legal classification depends on how the tenant uses the premises, not what you call the lease. For example, if you lease a “warehouse” that the tenant uses as a showroom open to the public, retail lease laws could still apply.

Each state and territory defines “retail” slightly differently, so always double-check the relevant legislation or seek legal advice.

Comparison: Commercial vs Retail Lease

Key Issue	Commercial Lease	Retail Lease
Governing law	Common law and general contract law	Retail tenancy legislation (state/territory based)
Protections for tenants	Minimal	Extensive disclosure and cost limits
Rent review regulation	Flexible	Regulated, e.g. CPI or market rent review methods often prescribed
Land tax recoverable from the tenant	Usually yes	Often prohibited
Disclosure statement required	No	Yes, before the lease is signed
Typical tenants	Offices, warehouses, manufacturing	Shops, restaurants, hairdressers, service outlets

Key legal issues landlords need to consider before leasing

The lease agreement between you and your tenant is the most important document. It is wise to fully understand the conditions you are entering into before signing. This is because your agreement may run for many years, depending on the type of lease. 

Rent, outgoings, and rent review clauses

Getting the rent structure right is critical. Common rent models are: 

• Fixed rent
• Rent plus outgoings
• Rent dependent on turnover (for retail leases)

In addition to the rent, be clear on who pays rates, utilities, and maintenance. Most landlords pass these “outgoings” on to tenants, but the lease must specify them in detail.

After a year or so, you’ll need to check if the rent you’re receiving is still valid. The rent review process should be defined in your contracts and can based on:

• CPI increases (linked to inflation)
• Fixed percentage increases
• Market rent reviews (based on comparable premises).

Poorly defined rent review clauses can lead to disputes or unexpected underpricing. Always document when and how reviews occur.

Lease term, options, and exit risk

The term refers to the initial lease period, typically ranging from three to five years. Tenants may request options to renew, so they can extend the lease at expiry.

From a landlord’s view, this creates predictability but can also lock you into a relationship with an underperforming tenant. Consider shorter terms with renewal options subject to conditions (like no arrears or breaches).

You should also discuss whether the lease includes any break clauses, which are rights for either party to terminate early under specific circumstances. While not common in short commercial leases, these can be useful for protecting against long-term vacancy risk.

Maintenance, repairs, and property condition

There are frequent misunderstandings around maintenance. Typically, landlords cover structural repairs, while tenants handle day-to-day maintenance. However, “maintenance” can be a grey area, so clarity in the lease is vital.

Include a “make good” clause, which requires the tenant to return the property to its original condition (reasonable wear and tear excepted). Disputes often arise here, so document the property’s condition at the start with photos or reports.

Security, guarantees, and enforcement

Before handing over the keys, secure adequate financial protection. Common options include:

• Bank guarantees (usually worth three months’ rent)
• Security deposits
• Personal guarantees from company directors.

Make sure the lease outlines how and when this security can be used. Clear enforcement processes protect you if the tenant defaults or vacates early.

Common disputes when leasing business premises

Even well-drafted leases can lead to disagreements. Common dispute areas include:

• Non-payment of rent: Tenants falling behind on payments is the most frequent issue. The lease should specify notice periods and remedies (such as re-entry or calling on the bank guarantee).
• Repairs or property damage: Disputes over who’s responsible for certain repairs often arise when definitions are unclear.
• Early termination or abandonment: If a tenant leaves early, landlords may need to seek breach remedies or re-lease the space quickly.
• Misunderstandings about permitted use: Tenants using the property for an unapproved purpose can risk council or zoning breaches.

Remaining professional and referring to clear lease terms usually resolves these issues faster than litigation.

Do you need a lawyer, or can you use a lease template?

Leasing documents vary in complexity. While large corporations engage property lawyers for every detail, many small business landlords simply need a practical, compliant lease that protects their basic interests.

When a standard lease template is appropriate

If you’re leasing a single small office, storage unit, or workshop to a straightforward tenant, a standard lease template may suffice. Templates are cost‑effective, quick to generate, and suitable for relatively simple lease terms where both parties understand their obligations.

When legal review is strongly recommended

However, consider legal help if the lease involves:

• High-value or long-term premises
• Retail tenancies covered by state legislation 
• Complex rent arrangements (like turnover rent or incentives)

A small upfront legal cost can save thousands in disputes later.

Practical checklist before leasing your premises

Before signing or offering your property for lease, work through this practical checklist:

• Confirm whether it’s a commercial or retail lease.
• Identify which state or territory legislation applies.
• Verify the permitted use of the premises under zoning laws.
• Structure rent and outgoings clearly.
• Agree on rent review timing and calculation method.
• Clarify maintenance and repairs responsibilities.
• Document the property condition before occupation.
• Arrange adequate security or guarantees.
• Decide whether to use a template or a lawyer-prepared lease.
• Keep copies of disclosure documents if retail laws apply.

A clear, written lease with appropriate attachments (like a floor plan or schedule of condition) can significantly reduce misunderstandings later.

FAQ

Do residential tenancy laws apply to business leases?

No. Residential tenancy laws only apply to housing for personal use. Business leases, commercial or retail, are governed by contract law and state retail leasing legislation, not residential tenancy rules. 

What protections can landlords include if a tenant stops paying rent?

The lease should specify remedies such as charging interest on late payments, drawing on the security deposit or bank guarantee, and re-entering the premises after giving the required notice. You can also include personal guarantees to ensure recourse against company directors.

Are retail leases more restrictive for landlords than commercial leases?

In some ways, yes. Retail lease laws restrict landlords from passing on certain costs (like land tax) and impose mandatory disclosure requirements. However, with proper preparation, retail leases still provide reliable income and tenant stability for well‑located premises.

Drafting a compliant and effective lease agreement

Leasing business premises can be a valuable strategy for small business landlords to generate extra income. But every lease involves legal, financial, and operational decisions that affect your long‑term return and risk exposure.

To ensure you start with the right foundation, consider using Lawpath’s professionally drafted Lease Agreement Template, designed to meet Australian legal standards and tailored to each state’s requirements. 

With the right documents and due diligence, you can lease your property confidently and keep your business interests protected.