Navigating Commercial vs Industrial Leases in Australia
When looking for commercial or industrial property as a business owner or investor, one of the first things you’ll need to decide is what type of lease is best suited for your needs. Commercial and industrial leases have some key differences that are important to understand before signing on the dotted line. At Create Real Estate, we have extensive experience guiding clients through both commercial and industrial leases across Victoria and beyond. Read on as we break down the main differences between these two common types of property leases.
Defining Commercial and Industrial Properties
First, let’s clearly define what we mean by commercial and industrial properties. Commercial properties are buildings used for retail, office, hospitality or mixed-use purposes. This includes shopping centres, standalone shops and restaurants, office buildings, hotels, medical centres, and more. The key unifying factor is that commercial properties focus on commerce and providing services.
On the other hand, industrial properties are used for manufacturing, production, warehousing, and logistics. Think factories, warehouses, distribution centres, manufacturing plants, etc. The activities carried out on industrial properties relate to producing goods or providing integral supply chain support.
While there can sometimes be overlap, this core distinction between commercial properties’ customer-facing purpose and industrial properties’ production/logistics purpose informs many of the differences in their leases.
Lease Length and Terms
One major difference between commercial and industrial leases is typical lease length and terms. Commercial leases tend to be shorter, often 3-5 years on average, compared to 5-10+ years for many industrial leases. The reason for this variance primarily comes down to fitout costs.
Fitting out retail shops, restaurants, offices and other commercial tenancies can be very expensive. Tenants must install flooring, lighting, counters, amenities, and other custom elements that match their brand identity. Since the fitout investment is lost when the lease ends, tenants want a shorter lease term to maximise their return on investment.
Conversely, industrial properties require less fitout investment. They are typically large open warehouse spaces or manufacturing facilities with minimal customisation required. Thus, industrial tenants are comfortable signing longer leases to secure their space without worrying about fitout costs down the track.
In addition to base lease length, review terms also differ. Commercial leases often have reviews every 1-2 years to reevaluate rent, whereas 3-5 year reviews are more common for industrial leases. This again relates to the higher volatility and costs associated with the retail/commercial market.
Rental Costs and Considerations
Rental costs are impacted by the differing nature of commercial and industrial properties too. Commercial rents are usually charged per square metre. Key factors that determine prices include location, foot traffic, fittings, building class, and more. For example, a ground floor retail space in a prime CBD location will attract far higher square metre rents than an office on a lower level with less exposure.
Industrial rents are typically charged per square metre or cubic metre, or even as a dollar rate per pallet space in warehousing scenarios. Key factors like height to underside, floor loading capacity, yard space, power supply, and access to transport routes influence pricing. Unlike the commercial market, location is less crucial for industrial tenants.
Another key rent consideration is outgoings or triple net charges. With commercial leases, tenants traditionally pay base rent plus a proportional share of outgoings like rates, taxes, insurance, utilities, and building maintenance based on their leased floor area. In industrial leases, it is increasingly common to see a “gross rent” charged where outgoings are bundled into the single dollar per square metre amount.
Usage Clauses
The permitted use of the property is more tightly controlled in commercial leases compared to industrial leases. For example, a shop lease will specify the tenant can only operate their defined business from the premises. This protects the landlord from tenants changing to a use that could compromise other tenants or operations in the shopping centre.
Industrial leases tend to have more flexible usage terms, only restricting the tenant from uses that are hazardous or illegal. This gives tenants the leeway to adapt and adjust their production activities over long leases in response to changing business conditions.
Insurance and Maintenance Responsibilities
Another area where commercial and industrial leases differ is the split of insurance and maintenance obligations between landlord and tenant.
Commercial leases usually see landlords responsible for building insurance and structural/exterior maintenance while tenants cover internal maintenance and public liability insurance. This balances risk and costs appropriately between the parties.
Industrial leases tend to make tenants responsible for all insurance including building cover. Tenants also take on internal and external maintenance as well as capital repairs in many instances. This is justified by the lower comparative maintenance and long, stable lease terms that industrial tenants enjoy.
Assignment and Subletting
The ability to assign or sublet part or all of the leased premises also varies between commercial and industrial leases.
Commercial leases often place tight controls on assignments and subletting. Retail shop tenants in particular want the other tenants in a shopping centre to complement their offering rather than compete directly. So most quality commercial leases will require landlord consent for any assignment or sublease.
Industrial leases give tenants more freedom to assign or sublet without needing the landlord’s permission in most cases. This provides more flexibility as businesses grow and require less space or if they need to downsize. Of course, hazardous uses would still be prohibited.
Fitout and Make Good Provisions
We’ve touched on fitouts briefly already, but it’s worth reiterating the significant impact they have on commercial versus industrial leases.
Retail and office leases will contain detailed clauses on the fitout works permitted and how any landlord contributions (e.g. a rebate incentive) are handled. They’ll also cover make good obligations i.e. requiring the tenant to return the property to its original condition at lease end.
Industrial leases don’t need the same level of prescription around fitouts or make goods given the simpler warehouse-style premises. There is less scope for customisation during a lease term or a need for major reinstatement works at the end.
In summary, while commercial and industrial leases share the same fundamental purpose of governing a property tenure, the operational differences between the two sectors lead to variances in standard lease terms across length, rent, usage, maintenance and more. Being aware of these key differences as a business owner or investor allows you to negotiate the best possible lease structure.
The team at Create Real Estate have negotiated hundreds of commercial and industrial leases across Victoria. Our experience means we can offer expert guidance tailored to your objectives. Whether you’re looking to secure retail space, expand your manufacturing footprint or invest in commercial or industrial real estate, contact our professional team to discuss your needs today.