Securing a physical location, whether a light industrial warehouse in Welshpool, a boutique retail footprint in Subiaco, or office space in West Perth, is often one of the most exciting milestones for a growing business. It signals scale, stability, and ambition.
However, a commercial lease is also one of the largest long-term financial liabilities a small to medium business owner will ever sign.
Unlike residential tenancy laws, which heavily protect the tenant, commercial leasing operates under a philosophy of “freedom of contract”. Landlords draft leases to maximise their yields, shift risk onto tenants, and protect their capital assets. If you sign a commercial lease without negotiating the fine print, you are not just committing to monthly rent, you may be taking on hidden liabilities that can erode your profit margins or force your business into financial distress years down the track.
Here are 5 dangerous commercial lease clauses WA business owners frequently overlook, and how to negotiate them before you sign.
1. The “Make-Good” Trap (End-of-Lease Cash Drains)
Many business owners focus entirely on the rent they will pay during the lease term and forget to calculate what it will cost to leave.
A “Make-Good” clause specifies the condition in which you must return the premises at the expiry of the lease. These clauses typically fall into three categories:
- Basic Repair & Clean: Returning the premises in a clean condition, subject to fair wear and tear (the tenant-friendly option).
- Repaint & Re-carpet: Requiring you to repaint walls and replace carpets at fixed intervals or at the end of the term.
- Full Reinstatement (Bare Shell): Requiring you to remove every fit-out, partition, cabling, floor covering, and structural modification you installed, and restore the premises back to a bare concrete shell.
The Cash Flow Risk
Undertaking a full reinstatement on a 300sqm office or industrial unit can easily cost between $30,000 and $100,000+ in contractor fees, demolition costs, and waste disposal. Worse still, if the make-good work delays the landlord from re-letting the space, you may be charged “holding over” rent at double the standard rate until the work is complete.
The Fix
Negotiate the make-good clause before signing the Heads of Agreement. Strive for a clause that requires you to return the premises in its condition at the lease commencement date, “fair wear and tear excepted,” supported by a thorough, signed Condition Report with photo evidence attached to the lease.
2. Uncapped Outgoings & Missing Audit Rights
Commercial rent is typically structured as either “Gross” (outgoings included in rent) or “Net” (base rent plus your share of operating outgoings). In a Net lease, you pay for your proportion of the building’s operational costs.
Outgoings typically include:
- Local council rates (e.g. City of Perth, City of Stirling).
- Water rates and land tax (calculated on a single-holding basis).
- Building insurance premiums.
- Property management fees and maintenance charges for common areas.
The Cash Flow Risk
If outgoings are uncapped, a sudden spike in land tax assessments, building insurance, or unexpected capital repairs passed on by the landlord can unexpectedly blow out your monthly overheads by 15% to 30%. Furthermore, some landlords attempt to pass on their own capital improvements or legal costs as operational outgoings.
The Fix
Request an itemised budget of historical outgoings for the past 2–3 years before committing.
Ensure land tax is calculated on a single-holding basis (preventing you from paying higher land tax rates caused by the landlord owning multiple commercial properties across WA).
Include a right to audit annual outgoing statements and explicitly exclude capital repairs, structural works, and the landlord’s personal legal fees from recoverable outgoings.
3. Rent Review Traps & The “Ratchet” Clause
Commercial leases run for several years, so they include mechanisms to adjust rent over time. These reviews generally occur annually via one of three methods:
- Fixed Percentage Increases (e.g., 3.5% to 5% per annum).
- CPI Reviews (adjusted according to the Consumer Price Index).
- Market Rent Reviews (typically occurring at the start of a renewal option term).
The Cash Flow Risk: The “Ratchet” Clause
A “ratchet clause” states that following a Market Rent Review, the rent cannot decrease, even if market conditions in Perth have softened and commercial rents across the suburb have fallen. This traps your business in an artificially high rent structure while your competitors down the road negotiate lower rates.
The Fix
Always negotiate for a true two-way market rent review (allowing rent to go up or down based on genuine market evidence), or cap market increases to a maximum percentage (e.g. no more than 10% above the preceding year’s rent).
Important WA Legal Protection: If your business qualifies under the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA), ratchet clauses are void by law. However, if you operate an office or industrial warehouse outside the scope of the Act, ratchet clauses remain legal and enforceable unless negotiated out.
4. Personal Guarantees with Unlimited Director Exposure
Landlords frequently demand personal guarantees from company directors to secure the performance of a corporate tenant. By signing an unlimited personal guarantee, you pledge your personal wealth, including your family home, savings, and personal assets, to back the obligations of your company under the lease.
The Cash Flow Risk
If your business faces a downturn, restructures, or goes into liquidation, the landlord can bypass the company and sue you personally for all remaining rent across the rest of the lease term, outstanding outgoings, interest, and make-good liabilities.
The Fix
Never default to an unlimited personal guarantee without attempting to negotiate limits:
- Cap the Guarantee: Limit the personal guarantee to a fixed monetary sum (e.g. 6 months’ rent) or time period (e.g. expiring after the first 2 years of compliant tenancy).
- Substitute for Security: Offer a larger Bank Guarantee or Cash Deposit (e.g. 3 to 6 months’ gross rent) in lieu of personal director guarantees.
- Director Release Clauses: Ensure that if you sell your business or resign as a director, the lease includes a formal mechanism requiring the landlord to release your personal guarantee upon the new buyer providing equivalent security.
5. Demolition & Relocation Clauses (Unplanned Business Disruption)
It is increasingly common for landlords in commercial centers or redeveloping precincts (such as West Perth, Fremantle, or Morley) to insert demolition or relocation clauses into standard commercial leases.
- Demolition Clause: Allows the landlord to terminate your lease early if they intend to demolish, substantially renovate, or redevelop the building.
- Relocation Clause: Allows the landlord to force your business to move to an alternative unit within the building or complex to accommodate a larger incoming tenant.
The Cash Flow Risk
If a landlord exercises a demolition clause, your business could be given as little as 3 to 6 months’ notice to vacate. You lose your fit-out investment, forfeit established local foot traffic, and incur emergency moving costs, often with minimal compensation from the landlord.
The Fix
Push to strike out demolition and relocation clauses entirely during lease negotiations.
If the landlord insists on retaining the clause, negotiate a lockout period (e.g. the clause cannot be exercised during the first 3 years of the term).
Ensure the lease mandates significant financial compensation from the landlord for unamortised fit-out costs, legal fees, and moving expenses if early termination occurs.
Knowing Your Safeguards: The Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA)
If your business sells goods to the public, provides retail services, or is located within a shopping centre or specified retail precinct, your lease may be governed by WA’s Commercial Tenancy (Retail Shops) Agreements Act 1985.
Where the Act applies, it grants WA business owners important statutory rights that override harsh lease terms, including:
- Minimum 5-Year Tenancy Rights: Entitling tenants to a minimum 5-year lease duration (including option periods).
- Mandatory Disclosure Statements: Requiring landlords to provide a detailed disclosure statement detailing all estimated outgoings at least 7 days before you sign.
- Prohibition of Landlord Legal Costs: Landlords cannot pass on the legal costs of drafting the initial lease to retail tenants.
- Ban on Ratchet Clauses: Market rent reviews cannot prevent rent from decreasing if market rates drop.
Determining whether your tenancy falls under the Act can be complex, particularly for medical clinics, gyms, showrooms, and service-based businesses, making independent legal verification critical.
Where to Start
If you are negotiating a new commercial lease, facing an upcoming rent review, or unsure what hidden liabilities are tucked into your current agreement, that’s exactly the conversation we have with business owners every day.
At Aesir Legal & Advisory, we work with Perth small and medium business owners to review, negotiate, and structure commercial leases that protect your cash flow, limit personal director exposure, and safeguard what you have built.
It is not as complicated or as expensive as most people assume. And negotiating before you sign always gives you the most leverage.
Book a free consultation and we will review your lease terms to give you a clear picture of where your risks lie and what, if anything, needs attention.
Sakhawat Kabir (Sakhi) is the Principal of Aesir Legal & Advisory and the General Counsel and Executive for Carey Group Holdings, one of WA's top 100 private businesses. He has nearly 20 years of experience in corporate law and commercial leadership across Australia and internationally.
This article is general information only and does not constitute legal advice. For advice specific to your situation, please contact us directly.