Leasing Commercial Space in Australia: A Guide for International Occupiers

Australian commercial leasing looks familiar to overseas occupiers, but several local conventions change the real cost of a lease. Incentives, makegood, bank guarantees and outgoings are the four that most often surprise companies entering the market from the US, UK, Europe or Asia.

This guide is for international companies leasing office or industrial space in Australia for the first time. It explains how a deal comes together, what each cost really means, and what a foreign entity needs to have in place before signing.

It is general guidance only. Get legal, tax and accounting advice on your specific transaction.

How a deal comes together

Start 12 to 18 months before you need to occupy for a significant office requirement, and earlier for large or purpose-built space. Fitout alone often takes 3 to 6 months after the lease is signed.

1. Brief and strategy. Define headcount, growth, work style, location and budget. Decide whether to lease, sublease or start in flexible space.
2. Market search and shortlist. Your advisor surveys on-market and off-market options, including space not yet advertised.
3. Proposals and competitive tension. Landlords submit written proposals. Running several options in parallel is how tenants secure the best terms.
4. Heads of Agreement. A short summary of the commercial terms, usually non-binding. Most of the commercial negotiation happens here.
5. Agreement for Lease (where needed). Used when works must happen before you move in, such as a landlord-delivered fitout or a new building.
6. Lease. The full legal document, typically drafted by the landlord’s lawyers and negotiated by yours. Longer leases are often registered on the property title.
7. Fitout, approvals and move-in. Design, building approvals, construction and relocation.
8. Ongoing management. Rent reviews, options to renew and critical dates through the term.

The landlord usually pays the agents’ leasing commissions. Ask your advisor to confirm in writing who they act for and how they are paid.

Rent: what you actually pay

The advertised rent is rarely what you pay. Compare options on effective rent over the full term, not on the quoted face rent.

• Face rent vs effective rent. Face rent is the headline figure in the lease. Effective rent is what you really pay once incentives are taken into account.
• Gross vs net. A gross rent includes the building’s operating costs. A net rent excludes them, and you pay outgoings on top. Conventions vary by city: Sydney is commonly quoted net, while Melbourne is commonly quoted gross.
• Outgoings. Your share of the building’s operating costs, such as council rates, land tax, insurance, cleaning, security and management fees. Ask for the budget and recent actuals. Check whether land tax is recoverable and whether outgoings are capped.
• Rent per square metre. Rent is quoted per square metre of net lettable area (NLA) per year. Confirm how the area was measured.
• Rent reviews. Reviews are usually annual, either fixed (a set percentage each year) or linked to CPI. Market reviews often apply when an option to renew is exercised. Fixed annual increases compound, so model the full term.
• GST. Goods and Services Tax of 10% is charged on rent and outgoings. Registered businesses can generally claim it back, but it affects cash flow and the size of your bank guarantee.
• Car parking and signage. These are usually separate licences with their own fees.

Incentives

Incentives are the biggest lever in an Australian lease, and the one overseas occupiers most often under-negotiate. Landlords offer them to protect their face rents, because face rents drive building valuations.

Incentives are typically expressed as a percentage of the total net rent over the term. They are usually larger for longer leases and larger tenancies, and they move with market vacancy. Current levels vary widely by city, grade and building, so get live market evidence before negotiating.

Common structures:

• Rent-free periods. No rent for a set number of months, often at the start of the lease.
• Rent abatement. A percentage discount on rent spread across the term.
• Fitout contribution. A cash contribution toward your fitout, or the landlord builds it for you.
• A mix of all three. Many deals combine them to match the tenant’s cash flow and accounting needs.

Incentives are usually tied to the full lease being honoured. If you leave early, landlords often seek to claw back the unamortised portion. Read those clauses carefully.

Fitout and makegood

In Australia the tenant usually designs, builds and pays for its own fitout, and must remove it at the end of the lease. Both costs belong in your total occupancy budget from day one.

Fitout

• Office space is commonly leased as a shell with base-building services, sometimes with an existing fitout from a previous tenant.
• The landlord’s fitout contribution is usually part of the incentive package.
• Works need landlord consent and building approvals, and must meet the landlord’s fitout guidelines. Allow time for these in the programme.
• A second-hand fitout can save significant cost and time, but check its condition and who owns it.

Makegood

• Makegood is your obligation to return the premises to an agreed condition when the lease ends, often back to base building.
• It can be a large, late surprise, and disputes are common.
• Negotiate the makegood standard in the Heads of Agreement. Document the starting condition with a schedule and photographs. Consider agreeing a cash settlement in place of physical works.
• Many landlords will negotiate a makegood waiver or cash payment, especially if the next tenant may use your fitout.

One team covering design, construction and makegood avoids gaps between your lease terms and what is physically built.

Security: bank guarantees and parent guarantees

Australian landlords usually require a bank guarantee from an Australian bank, and a new local entity with no trading history may also be asked for a parent company guarantee. Arrange both early, because they can delay signing.

• Bank guarantee. Commonly equal to several months’ gross rent plus GST. It must be issued by an acceptable Australian bank, and setting it up for a new entity can take weeks.
• Cash bond. Sometimes accepted in place of a bank guarantee.
• Parent company guarantee. Often requested when the tenant is a newly formed subsidiary. Negotiate a cap on the amount and how long it lasts.
• Reductions. Ask for the security to reduce over the term as your local entity builds a track record.

If you are a foreign company

Sort out your legal entity before the lease, because the entity that signs determines the security a landlord will ask for. Several points are worth raising with your lawyers and accountants early.

• Entity. Decide whether the lease is signed by a local subsidiary or by the overseas company registered as a foreign company in Australia. You will also need an Australian Business Number (ABN) and GST registration.
• Foreign investment approval. Under Australia’s Foreign Investment Review Board (FIRB) rules, a long lease of commercial land can count as an interest in Australian land. Most standard office and industrial leases fall below the relevant thresholds, but confirm this with your lawyers.
• Time zones. Decisions often stall waiting for head-office approval. Agree internal sign-off authority and timelines before negotiations start.
• Accounting. Leases sit on the balance sheet under IFRS 16 and US GAAP (ASC 842). The way incentives are structured can affect your reported numbers, so involve your finance team.
• Lease length vs flexibility. Longer terms win bigger incentives. Options to renew, break clauses and expansion or contraction rights can give flexibility without giving up the incentive.

Industrial and logistics space

Industrial leases follow the same structure as office leases but are usually net, with smaller incentives and more emphasis on the building’s physical capability. Check the specification against your operation before you negotiate price.

• Rent basis. Usually net, with outgoings paid on top. Rent is quoted per square metre for the warehouse, office and sometimes hardstand areas separately.
• Specification. Confirm clear internal height, floor load, sprinklers, power supply, loading docks, awnings, hardstand and truck access for the vehicle sizes you use.
• Location. Proximity to ports, airports, motorways and your workforce drives both rent and operating cost.
• Zoning and approvals. Your intended use, operating hours and any hazardous goods must be permitted on the site.
• Pre-lease developments. Large occupiers often commit to a new building before it is built, through an Agreement for Lease with design and completion terms.
• Repairs and maintenance. Industrial tenants often carry more responsibility for maintenance and building services than office tenants.

How Australia compares

The biggest differences for most overseas occupiers are longer terms than in Asia, annual rather than five-yearly rent reviews compared with the UK, and makegood obligations that are often broader than US restoration clauses. The table shows typical office conventions; individual deals vary.

Working with an independent tenant advisor

In Australia, most leasing agents are appointed and paid by landlords, and many large agencies act for landlords and tenants at the same time. An advisor who acts only for tenants has no listings to fill and no conflict to manage.

Niche Advisory represents tenants exclusively, nationally, across office and industrial space. We can manage the whole process from one team:

• market strategy, search and lease negotiation
• workplace design and fitout delivery
• makegood and relocation
• critical dates and lease management through the term

For a confidential discussion about your Australian requirement, Contact us

This guide provides general information only and is not legal, tax or financial advice.