The Ins and Outs of Commercial Leases in Australia

If you’re looking to lease commercial property in Australia, it’s essential to understand the different types of commercial leases available. With the proper lease agreement, you can secure premises that align with your business needs and set your company up for success. This guide from the team at Create Real Estate will walk you through the significant kinds of commercial leases in Australia and what you need to know about each one.

Gross Lease
One of the most common types of commercial leases is a gross lease. This is where the tenant pays a fixed monthly rental amount, including property taxes, building insurance, and maintenance fees. The advantage for the tenant is that the rent stays the same, despite any fluctuations in the landlord’s costs for taxes, insurance, maintenance, etc.

The tenant is responsible for their utility costs like electricity, gas, water, and garbage removal. The landlord covers the rest. This lease provides the most certainty for the tenant when budgeting operating expenses.

Another benefit of a gross lease is the landlord handles all repairs and maintenance for the building. If something breaks down, like the HVAC system or a roof leak, the landlord fixes it as part of the lease agreement. The tenant doesn’t have to worry about surprise maintenance costs.

The downside is the tenant has less control over operating costs since the rent is fixed. Also, the base rent per square foot is usually higher than a net lease to cover the landlord’s expenses. This may result in higher overall occupancy costs.

Net Lease
A net lease is where the tenant pays base rent plus their share of property taxes, building insurance, and maintenance costs. This gives the tenant more control over operating expenses. If the landlord keeps expenses low, the tenant reaps the rewards through lower occupancy costs.

The complicating factor is calculating the tenant’s share of expenses. This is typically based on the proportion of space leased relative to the entire building. For example, if the tenant leases 25% of the building, they would pay 25% of the tax and insurance bills.

The landlord still handles maintenance, but the tenant reimburses some expenses. Items like standard area maintenance (CAM) are also divided proportionally between tenants. CAM includes costs like cleaning public spaces, landscaping, snow removal, security, parking lot maintenance, etc.

The advantage of a net lease is lower base rent and more tenant control. The disadvantage is the administrative hassle of tracking shared expenses and paying your portion every month. It also involves uncertainty, knowing the final occupancy costs once the landlord reconciles all the payments at year-end.

Modified Gross Lease
A modified gross lease has become popular for retail spaces as a hybrid between a gross and net lease. The landlord receives base rent and handles maintenance, property taxes, and building insurance. The tenant pays a CAM charge on top of rent to cover a share of maintenance and operational costs for common areas. They also produce their own utility expenses.

Modified gross leases give the tenant more predictable occupancy costs than a net lease. The landlord also has less administrative work without calculating the tenant’s precise share of every expense. An estimate for CAM charges will be included in the initial lease agreement.

The potential downside for the tenant is the landlord may inflate the CAM fees above the actual costs. So the modified gross lease works best when the CAM charges are reasonable and in line with industry standards.

Double Net Lease
A double net lease is similar to a standard net lease but typically doesn’t include property taxes or building insurance. Under this agreement, the tenant pays base rent plus a share of maintenance and CAM expenses, utilities, property taxes, and building insurance. This gives tenants significant control over occupancy costs.

The double net lease is advantageous for landlords with limited funds who can’t afford unexpected property costs. It transfers more operating expenses to the tenant. The tenant takes on greater risk but has transparency into expenses and can negotiate caps on increases.

If property taxes and insurance spike one year, the tenant absorbs the increase instead of the landlord. TheCatch is both parties must closely track shared expenses and settle up with proper reimbursements every month. So double net leases require clear communication and financial diligence from both sides.

Triple Net Lease
Under a triple net lease, the tenant pays everything except landlord mortgage payments. This usually includes base rent, property taxes, building insurance, maintenance, utilities, and CAM expenses. It’s an extreme version of the net lease that shifts almost all operating costs to the tenant.

Triple net leases are rare for smaller retail and office tenants. They are more familiar with single-tenant commercial buildings leased to large corporations. Since only one tenant is using the entire space, it makes sense for them to pay the operating expenses.

The tenant benefits from control over costs without subsidising other tenants. But they take on a substantial administrative burden, directly tracking and paying all expenses. The landlord collects base rent each month.

Tenants should negotiate a cap on expense increases with triple net leases to prevent uncontrolled cost spikes. Carefully review operating history and projections with the landlord upfront to understand potential costs. Even with tremendous financial responsibility, triple net leases offer transparency and equity for major corporate tenants.

Percentage Lease
A percentage lease offers a unique rent structure for retail tenants. Instead of flat monthly rent, the tenant pays a base rent plus a percentage of monthly or annual sales revenue—for example, a 10% overage on gross sales above $1 million for the year.

Landlords favor percentage leases because they earn higher rent from successful tenants doing more business. It brings in revenue based on store performance rather than a fixed rate. Percentage rent also mitigates the landlord’s risk if sales decline with an economic downturn.

For tenants, the advantage of percentage rent is lower base rent per square foot. The landlord gets comfortable with a lower fixed rent knowing they will earn more if sales are strong. The tenant also appreciates paying rent based on their success and ability to pay. If sales are down, rent decreases automatically.

The obvious disadvantage is the uncertainty of total occupancy costs. A percentage lease makes it harder to budget expenses, not knowing the exact sales revenue and rent for the coming year. But it aligns costs with the tenant’s financial means. Like the landlord shares in sales upside, they also share the downside if business slows.

Choosing the Right Commercial Lease
With an overview of crucial lease types, how do you choose the right one for your business?

Here are a few tips:
Assess how much control you want over occupancy costs – Gross and modified gross leases have fixed expenses, while net and double net give tenants more responsibility and authority.
Gauge administrative bandwidth – Net leases require time and effort to reconcile shared costs, while gross leases are more straightforward.
Understand current and projected business finances – Percentage leases link rent to sales performance.
Weigh risk tolerance – Net leases transfer more expenses to tenants subject to increases.
Consider established practices in your industry – Some sectors, like retail, often use percentage leases.
Review terms with your financial advisor – They can assess cash flow impacts and tax consequences.
Work with an experienced real estate agent – They can explain the fine print and negotiate favorable terms.

The ideal commercial lease aligns with your business priorities, capabilities, and financial circumstances. As one of Australia’s leading commercial real estate agencies, Create has the expertise to guide you through the process. Contact our team today to take the first step in securing the perfect retail space.