Commercial Lease Due Diligence When Buying a Business in Australia: What You Must Check

Commercial lease due diligence when buying a business in Australia means reviewing the lease agreement for the premises the business occupies to understand your rights, obligations, and risks as an incoming tenant. In most small business acquisitions — trades, cleaning, landscaping, pest control, retail — the business doesn't own its premises. It rents them. Which means the lease is as important as the profit and loss, and buyers who skip it properly often find out why at the worst possible time (usually about three weeks before settlement).

This guide covers what to look for, what can go wrong, and how to use the lease in your negotiation.

Why the lease matters more than most buyers think

The business runs on the premises. If the premises fall over — because the lease can't be transferred, the landlord refuses consent, or you're inheriting a make-good obligation worth six figures — the business you've just bought has a serious problem.

I've seen deals stall for six weeks because the seller didn't know their lease had a clause preventing assignment without landlord consent. The landlord knew. The landlord used that leverage. The buyer ended up renegotiating the whole deal under time pressure, which is exactly the position you don't want to be in.

The lease review sits inside your legal due diligence, but it deserves a separate pass. Most commercial leases in Australia run 50 to 150 pages once you include the disclosure statement and schedules. Your lawyer will review it, but you should understand what they're looking for.

Is the lease assignable?

The first question is whether the lease can be transferred to you at all.

Almost every commercial lease in Australia contains an assignment clause. This sets out whether, and how, the current tenant can transfer the lease to a new party — which is what happens when you buy the business. In most Australian commercial leases, assignment is permitted with landlord consent, but the consent cannot be unreasonably withheld.

That "not unreasonably withheld" language sounds reassuring. It isn't a guarantee. Landlords can refuse consent if they have legitimate concerns about the incoming tenant's financial position, the proposed use of the premises, or the track record of the business buyer. Whether a refusal is "unreasonable" is a legal question and sometimes a dispute.

Some leases prohibit assignment entirely. This is unusual but not unheard of in older or poorly drafted leases. If you find one, you're either renegotiating the lease from scratch (as a condition of the purchase) or you're walking away.

Getting landlord consent: how it actually works

In practice, getting landlord consent for a business lease assignment in Australia works like this:

The vendor (seller) formally requests consent from the landlord, usually via their solicitor
You provide financial references, a personal CV or résumé, and sometimes a business plan to the landlord
The landlord reviews and responds — typically within 14 to 28 days, though this varies
If approved, a Deed of Assignment is executed, transferring the lease from the seller to you

The landlord's consent is usually a condition precedent in the Sale and Purchase Agreement, meaning the deal can't proceed until consent is granted. Budget at least four weeks for this process. Budget more if the landlord is slow, has a corporate property manager, or if you're buying a business from a franchisee (where the franchisor may also need to consent).

One thing buyers miss: the landlord will often use the assignment process to upgrade the lease. If the existing lease has very favourable rent terms or an outdated make-good clause, the landlord may try to impose a new lease as a condition of consent. Your solicitor needs to flag this risk early.

Remaining lease term and options to renew

A business with three months left on its lease and no option to renew is worth significantly less than the same business with five years remaining plus a five-year option.

Check:

How much time is left on the current term?
Does the lease include options to renew, and on what terms?
Has the current tenant already exercised any options?
What is the process for exercising a future option, and what are the deadlines?

In Australia, missing an option deadline is a common and expensive mistake. Options to renew usually require written notice to the landlord within a specific window — often three to six months before the current term expires. If the seller missed that notice, the option is gone. You might be inheriting a lease with no right to renew and a landlord who knows it.

As a rule of thumb, if a business has fewer than three years remaining on its lease with no options, push for a price reduction or make renegotiating the lease a condition of purchase. Lenders will often refuse to finance a business acquisition if the lease term doesn't adequately cover their loan period.

Rent review mechanisms

Not all rent increases are equal. There are three common rent review mechanisms in Australian commercial leases:

CPI-linked: rent increases with the Consumer Price Index — typically modest, 2 to 4% per year
Fixed percentage: rent increases by a set percentage each year (3% is common in retail and commercial leases)
Market review: rent is reset to market value at the review date — this is where tenants get a shock

Market rent reviews are the most dangerous for buyers. They can produce large, unpredictable rent increases, particularly in commercial precincts where rents have moved significantly since the lease was originally signed. If the existing rent is well below market, a market review clause means you're inheriting a rent increase you can't price until it happens.

Ask for the current rent, the review dates, the review mechanism, and whether any reviews are coming up. Factor this into your valuation.

Personal guarantees on the lease

Most Australian landlords require personal guarantees from the directors of the tenant entity. When you buy a business and take over the lease, the landlord will typically require new personal guarantees from you.

This is one of the more significant obligations you're taking on. A personal guarantee on a commercial lease means you're personally liable for the rent, outgoings, and make-good costs for the duration of the lease — even if the business fails. This sits separately from any personal guarantee your bank asks for on the acquisition loan.

Understand what you're signing. Know the total potential liability. Some buyers try to cap the guarantee period or negotiate to have it released after a year of trading if they can demonstrate good payment history. Some landlords agree; most don't for small or unproven tenants.

Permitted use clause

The permitted use clause defines what the premises can legally be used for under the lease. If you're buying a cleaning business and the lease specifies "cleaning services depot" — great. If it specifies "office use only" — you have a problem.

Most sellers won't have thought about this. Most solicitors will catch it. But it's worth knowing to look for.

A permitted use issue can invalidate your fit-out, your equipment, and sometimes your council approvals if the use doesn't match the DA (development approval). It can also give the landlord grounds to end the lease. Ask specifically: is the current use of the premises consistent with the permitted use in the lease?

Make-good obligations

A make-good clause requires the tenant to return the premises to the condition they were in at the start of the lease — or sometimes to a standard defined in the lease — when the tenancy ends.

For trades and service businesses, make-good can involve:

Removing shelving, racks, wash bays, chemical storage
Patching concrete, repainting, replacing flooring
Removing signage and restoring facades

The cost varies enormously — from a few thousand dollars for a modest office fit-out to $80,000+ for a business with a substantial trade fit-out. This is a real liability you're taking on, and it's often not disclosed properly in the information memorandum.

Get a solicitor to review the make-good clause carefully, and if the fit-out is substantial, get a rough make-good estimate from a building contractor before you exchange.

Outgoings: what you're actually paying

The rent figure quoted in the information memorandum is usually the base rent — the number before outgoings. Commercial leases in Australia often require tenants to contribute to:

Council rates
Water rates
Building insurance
Body corporate levies (in strata)
Land tax (in some states)
Common area maintenance

Outgoings can add 10 to 30% to the effective rent cost. When you're modelling the business's cash flow, use total occupancy cost (base rent plus outgoings), not just base rent.

Ask the seller for a schedule of outgoings paid in the last 12 months. Your solicitor will check the lease's outgoings provisions as part of the due diligence when buying a small business.

Using lease issues to negotiate price

Most buyers treat the lease as a checkbox: you get consent, you proceed. Experienced buyers use lease issues as negotiating tools.

If the lease has:

Less than two years remaining with no renewal option → push for price reduction or new lease as condition
A market rent review coming up in the next 12 months → factor in estimated rent increase when valuing
Make-good obligations that are large relative to the business value → seek a price reduction or seller's contribution
Personal guarantee obligations you're uncomfortable with → negotiate a price reduction to compensate for the risk

I've seen buyers shave 5 to 10% off a purchase price by identifying lease risks the seller had either forgotten about or was hoping to glide past. The business sale settlement process is much smoother when these issues are identified and resolved before exchange, not after.

What to do if the landlord refuses consent

It happens. Usually for one of three reasons: the landlord doesn't think the buyer is financially strong enough, the landlord wants to use the vacancy for a different tenant or redevelopment, or the landlord wants to renegotiate the lease terms.

If the landlord refuses consent unreasonably, the seller can dispute it — but litigation is slow and a business acquisition deal doesn't survive a protracted landlord dispute. In practice, buyers and sellers have three options:

Negotiate with the landlord to find conditions under which they will consent (bank guarantee, larger security deposit, higher rent)
Renegotiate the entire lease — treat the purchase as an opportunity to get a new lease on better or worse terms, depending on your bargaining position
Walk away from the deal

If landlord consent is refused and the SPA is conditional on it, you get your deposit back. That's the protection the condition provides. Make sure your SPA is drafted properly — this is covered in detail in Module 5 of the Playbook.

Want the full legal due diligence checklist?

Grab the free Legal Due Diligence Checklist — it covers the lease review alongside all the other legal searches and checks you need to run before exchanging contracts on a business purchase.

FAQ

Do you need landlord consent to sell a business in Australia? In almost all cases, yes. Australian commercial leases require the landlord's consent before the lease can be assigned (transferred) to a new owner. Without consent, the transfer of the lease is invalid and the seller may be in breach of the lease agreement.

What is a lease assignment when buying a business? A lease assignment is the legal transfer of the existing tenant's rights and obligations under the lease from the seller to the buyer. It requires the landlord's written consent and is documented in a Deed of Assignment signed by all parties.

Can a landlord refuse to allow a lease transfer in Australia? A landlord can refuse consent to a lease assignment, but the refusal must not be unreasonable under most Australian state laws. Reasonable grounds include the buyer's poor financial position or a proposed change in use that contravenes the lease.

What happens to the commercial lease when a business is sold? The lease is assigned from the seller to the buyer with landlord consent. The buyer takes over the lease on the same terms (rent, term remaining, review mechanism) and typically provides new personal guarantees to the landlord.

How long does lease assignment take in Australia? The landlord consent process typically takes two to four weeks. If the landlord is slow, corporate-managed, or seeking to renegotiate, it can take six to eight weeks. Factor this into your settlement timeline.

For more on what to review before signing on a business purchase, read the full due diligence checklist or subscribe to The Leveraged Worker newsletter at nigelgordon.com/blog for weekly articles on buying and running blue-collar businesses in Australia.