Rising commercial rents and tightening vacancy rates across Perth and regional Western Australia are creating new financial risks for small business tenants. In a market where landlords hold increasing leverage, clauses that seemed routine when the lease was drafted can have a devastating financial impact over a five or ten-year term. A rent review mechanism that compounds at four per cent per year. A make-good obligation that costs $40,000 to fulfil when you leave. A personal guarantee that exposes your family home to your business’s lease liabilities.
These are not edge cases. They are the standard provisions in thousands of commercial leases across Western Australia, and they catch tenants off guard every week because nobody told them what to look for before they signed.
This guide focuses on the three critical areas that carry the most financial risk for WA commercial tenants: the rent review mechanism, the make-good obligations, and the personal guarantee and security provisions. These are the clauses that determine whether your lease is a manageable overhead or a financial trap, and they are the areas where professional review before signing delivers the highest return on investment.
While this guide centres on these three areas, the reality of commercial leasing involves many interconnected provisions. Understanding your legal position as a business owner before you commit to any significant contract is one of the most valuable investments you can make.
Thing One: The Rent Review Mechanism and Its Compounding Impact
The rent you agree to pay on day one is not the rent you will pay for the duration of the lease. Every commercial lease includes a mechanism for increasing the rent over time, and the type of mechanism determines how much you will actually pay over the full term. This is where the real financial commitment lies, and it is the provision that most tenants spend the least time evaluating.
Understanding the Three Main Review Types
Fixed percentage increases are the most common mechanism in WA commercial leases. The lease specifies a fixed annual increase, typically between three and four per cent, applied to the rent at each review date. The advantage is certainty: you know exactly what the rent will be in every year of the lease. The disadvantage is that in a softening market, your rent may significantly exceed market rates in the later years. And because the increase is compounding rather than simple, the cumulative effect is larger than most tenants anticipate.
To illustrate: a lease starting at $50,000 per annum with four per cent annual reviews will reach $60,833 in year five and $74,012 in year ten. Over a ten-year term, you will pay a total of $600,611, not $500,000. That $100,611 difference is the compounding effect that many tenants do not model before signing.
CPI increases adjust the rent annually in line with the Consumer Price Index. In stable economic conditions, CPI increases tend to be lower than fixed percentages, typically between two and three per cent. However, during periods of high inflation, CPI increases can spike unpredictably. The specific CPI index used and the calculation methodology should be clearly defined in the lease to prevent disputes about which figure applies.
Market reviews adjust the rent to reflect the current market value of the premises at the review date. In theory, market reviews benefit tenants during downturns because the rent should decrease if market values have fallen. In practice, many landlords include “ratchet clauses” that prevent the rent from falling below the existing level. Under the Commercial Tenancy (Retail Shops) Agreements Act 1985, ratchet clauses are prohibited for retail leases in WA. But for purely commercial leases that fall outside the Act, ratchet clauses are enforceable and are common.
What to Negotiate
Push for a cap on fixed percentage increases, particularly for longer lease terms. If the lease runs for ten years, a four per cent annual compound increase may price you out of the premises before the term expires. A cap at three per cent, or a provision that alternates between fixed and CPI reviews, provides a more balanced position.
For market reviews, negotiate for a fair and independent valuation process. This typically involves each party appointing a valuer, with a third valuer acting as umpire if the first two cannot agree. And resist ratchet clauses. If the landlord will not remove the ratchet entirely, negotiate for it to apply only to the first review, with subsequent reviews reflecting genuine market movement.
Understanding how these mechanisms interact with the broader commercial legal risks facing your business ensures you are not making lease decisions in isolation from your wider financial strategy.
The Numbers You Should Model Before Signing
Before you commit, model the total rent payable over the full lease term including all option periods. Calculate the rent at each review date under the proposed mechanism. Compare this against your revenue projections and cash flow forecasts. And stress-test the model: what happens if your revenue drops by 20 per cent but your rent continues to compound at four per cent?
This modelling takes an hour and can reveal whether the lease is financially sustainable for the long term or whether it becomes a progressively heavier burden as the years pass. It is one of the most valuable exercises you can perform before signing, and it is one that remarkably few tenants undertake.
Thing Two: Make-Good Obligations and the Cost of Leaving
The make-good clause defines the condition in which you must return the premises at the end of the lease. It is consistently one of the most underestimated provisions in any commercial lease, and it has the potential to generate a significant unexpected cost at precisely the moment you can least afford it: when you are winding down your occupation of the space.
What Make-Good Typically Requires
A standard make-good clause requires the tenant to remove all fixtures, fittings, partitions, and signage installed during the tenancy, repair any damage caused by the installation or removal of these items, return the premises to a specified condition, which may range from “reasonable condition” to “base building shell,” and in some cases, remove the entire fit-out including floor coverings, ceiling modifications, and internal walls, leaving a stripped-back shell.
The cost of make-good varies enormously depending on the size of the premises, the extent of the fit-out, and the standard specified in the lease. Stripping a fully fitted-out office back to base building condition can cost $50 to $150 per square metre. For a 200 square metre office, that is $10,000 to $30,000. For a larger premises with a more complex fit-out, the cost can exceed $50,000.
This is money you spend with zero return. It does not improve your next premises. It does not add value to anything. It simply restores the landlord’s building to a condition that may then be fitted out all over again by the next tenant, sometimes in an almost identical configuration.
The Traps in Make-Good Clauses
Vague standards. Clauses that require the premises to be returned to “original condition” without defining what that means invite dispute. What was the original condition? Without a detailed condition report prepared at the start of the lease, neither party has an objective baseline against which to assess compliance. This dispute typically arises at the worst possible time: when you are trying to vacate and the landlord is holding your bank guarantee.
No option for in-situ negotiation. Many outgoing tenants would prefer to leave the fit-out in place, particularly if it is in good condition and likely to be usable by the next tenant. Some leases permit this with landlord consent. Others require physical reinstatement regardless of whether the next tenant would use the existing fit-out. A clause that allows for negotiation on whether to leave the fit-out in place can save both parties significant cost.
Timing requirements. Some leases require make-good to be completed before the lease expires, meaning you lose access to the premises for trading purposes during the reinstatement period. Others allow a reasonable period after expiry. The timing provision affects your transition planning and should be factored into your exit timeline.
What to Negotiate
Before signing, negotiate for a clear, specific definition of the make-good standard rather than relying on vague terms. Consider negotiating a fixed dollar amount in lieu of physical reinstatement, which gives both parties certainty and avoids the cost and disruption of unnecessary work. Include a provision allowing the tenant to leave the fit-out in place with the landlord’s consent, which should not be unreasonably withheld.
And critically, prepare a detailed condition report at the start of the lease, with dated photographs and descriptions of every room, surface, and fixture. This report becomes the objective benchmark against which your make-good obligations are assessed. Without it, you are negotiating from a position of uncertainty that invariably favours the landlord.
This approach to documenting your position from the outset reflects the same principle that applies when reviewing any significant contract: the time to protect yourself is before the agreement is signed, not after a dispute has arisen.
Thing Three: Personal Guarantees, Security, and Your Exposure Beyond the Business
For many small business tenants, the personal guarantee is the most consequential provision in the entire lease. It is also the one that receives the least attention during negotiation, partly because tenants are eager to secure the premises and partly because the implications of a personal guarantee are abstract until the moment they become terrifyingly concrete.
What a Personal Guarantee Means
A personal guarantee is a commitment by an individual, typically the director of a tenant company, to be personally liable for the lease obligations if the company fails to meet them. If your company defaults on the rent, breaches the lease, or fails to complete its make-good obligations, the landlord can pursue you personally for the outstanding amounts.
This means your personal assets, including your home, your savings, and your investments, are exposed to the lease liabilities. If your business fails and the company is wound up, the personal guarantee survives. The landlord can and will pursue the guarantor for the remaining rent, the make-good costs, and any other amounts owing under the lease.
The scale of this exposure is often far larger than tenants realise. A five-year lease at $80,000 per annum represents a total commitment of $400,000. If the company defaults at the start of year two, the remaining rent liability alone is $320,000, plus make-good costs and any other amounts. That is a personal debt that can take years to repay and, in the worst case, can lead to personal bankruptcy.
Why Landlords Require Them
From the landlord’s perspective, a personal guarantee is a reasonable measure to ensure the tenant has genuine skin in the game. A company with limited assets that signs a multi-year lease creates a real risk for the landlord: if the company fails, the landlord is left with an empty premises and no practical way to recover the lost rent.
Personal guarantees are particularly common where the tenant company is newly established, has limited trading history, or has minimal net assets. In a tight market where landlords have multiple prospective tenants, there may be limited room to negotiate the guarantee away entirely. But there is almost always room to negotiate the scope and duration of the exposure.
What to Negotiate
Cap the guarantee amount. Rather than guaranteeing the entire remaining lease liability, negotiate for a cap, such as twelve months’ rent plus make-good costs. This limits your maximum personal exposure to a defined amount rather than an open-ended commitment.
Time-limit the guarantee. Propose that the personal guarantee falls away after a defined period of reliable payment, such as two or three years. This rewards good tenancy behaviour and progressively reduces your personal risk.
Release on assignment. If you assign the lease to a new tenant, your personal guarantee should be released. Without this provision, you may remain personally liable for the lease obligations even after you have transferred the lease to someone else and have no further connection to the premises.
Bank guarantee as an alternative. Some landlords will accept a bank guarantee in lieu of a personal guarantee. A bank guarantee ties up cash or credit facility but does not expose your personal assets to unlimited liability. The typical amount is three to six months’ rent.
Understanding the broader implications of personal liability is important for anyone operating through a company structure. The legal benefits of proper corporate structuring can be significantly undermined if personal guarantees effectively remove the liability protection that the company structure was designed to provide.
Beyond the Big Three: Other Clauses That Deserve Attention
While the rent review, make-good, and personal guarantee provisions carry the highest financial risk, several other clauses warrant careful review before you sign.
Assignment and Subletting
If your business circumstances change, the ability to assign your lease to a new tenant or sublet part of the premises can be the difference between a manageable transition and paying rent on a space you no longer need. The lease should provide that the landlord’s consent to assignment “cannot be unreasonably withheld.” Without this qualification, the landlord has an effective veto over your exit.
This is particularly important if you are planning for future scenarios such as selling your business, where the assignability of the lease is a material factor in the transaction value.
Permitted Use
The permitted use clause defines what activities you can conduct from the premises. If it is too narrow, you may need landlord consent to adapt your business model, which may come with conditions or additional rent. Negotiate for a description that is broad enough to accommodate reasonable evolution of your business over the lease term.
Outgoings
Outgoings are the building’s operating costs passed through to tenants. They can include council rates, water rates, land tax, insurance, maintenance, cleaning, and management fees. Watch for broad, undefined outgoings clauses and push for a specific list that excludes capital expenditure and items that benefit the landlord’s asset rather than your tenancy.
Land tax is a particularly contentious outgoing. In WA, it is a tax on the landlord as property owner, but many leases pass the cost through to the tenant. If land tax is included as a recoverable outgoing, be aware that the amount can increase substantially if the land is revalued or the landlord’s aggregated holdings push them into a higher tax bracket.
Option to Renew
Options give you the right to extend the lease without committing you to do so. They are valuable because they provide security of tenure without locking you in. But the notice requirements for exercising an option are strict. Missing the deadline, even by a single day, can extinguish the option entirely. Set a calendar reminder well in advance and treat this deadline as non-negotiable.
Also understand that exercising an option typically triggers a market rent review. The rent for the option period may be significantly higher than the rent you were paying, depending on market conditions at the time.
Non-Compete Provisions
In some multi-tenancy buildings and shopping centres, you may be able to negotiate an exclusivity clause that prevents the landlord from leasing to a competing business in the same building. Conversely, the lease itself may contain non-compete provisions that restrict your activities. Understanding the enforceability and implications of these clauses before you sign is essential.
The WA Regulatory Framework for Commercial Leases
The regulatory landscape for commercial leases in Western Australia depends on whether your lease falls within the Commercial Tenancy (Retail Shops) Agreements Act 1985 or operates under general contract law.
Retail Leases Under the CT Act
If your premises is a retail shop, either within a shopping centre or predominantly used for retail sales, the CT Act provides a range of tenant protections. These include mandatory disclosure by the landlord before the lease is signed, restrictions on certain types of rent review provisions including ratchet clauses, limitations on what outgoings can be recovered from the tenant, access to dispute resolution through the Small Business Commissioner and the State Administrative Tribunal, and restrictions on landlord interference with the tenant’s business.
The CT Act is currently under active review, with recommendations from a statutory review tabled in Parliament in October 2024. Draft legislative amendments are expected to be progressed from 2026 onward, with potential changes including early termination rights for financial hardship and broader application of the Act to service-based businesses.
Non-Retail Commercial Leases
If your lease does not fall within the CT Act, it operates under general contract law with significantly fewer statutory protections. This means the terms of the lease itself, as negotiated and signed, are largely determinative of each party’s rights and obligations. There are no mandatory disclosure requirements, no restrictions on rent review mechanisms, no limitations on recoverable outgoings, and no automatic access to low-cost dispute resolution.
For tenants entering non-retail commercial leases, the absence of statutory protections makes professional legal review even more important. The lease is a private contract, and the words on the page are what govern the relationship.
Lease Registration
In WA, leases under three years cannot be registered with Landgate. Leases between three and five years may be voluntarily registered. Leases exceeding three years, excluding renewal options, can and should be registered to protect the tenant’s interest against future purchasers of the property. If a lease is not registered and the property is sold, the new owner may not be bound by the lease, leaving the tenant without security of tenure.
The Cost of Not Getting Legal Advice
The cost of a professional lease review in WA typically ranges from $1,500 to $4,000 depending on the length, complexity, and negotiation required. This is a once-off investment that protects you for the duration of the lease.
The cost of not getting advice is measured in the tens or hundreds of thousands of dollars that accumulate when a poorly understood rent review compounds unchecked, when a make-good obligation costs three times what you anticipated, when a personal guarantee exposes your personal assets to a claim you did not foresee, or when an outgoings clause passes through costs that you assumed the landlord would bear.
For any business entering a commercial lease, the professional review is not the expense. It is the insurance. Businesses that invest in proper legal support from the outset consistently avoid the costly disputes that unprepared tenants encounter.
If you are in the Mandurah area and looking for qualified legal advice before signing a commercial lease, you can visit this website to connect with a professional who understands WA commercial leasing law.
Building Your Due Diligence Checklist
Before signing any commercial lease in WA, work through these practical steps.
Model the total rent payable over the full lease term, including all option periods and all review increases. Calculate the compound effect, not just the annual figure.
Request a copy of the lease and all schedules and annexures well before the signing date. Do not review the lease for the first time on the day you are expected to sign.
Engage a qualified property or commercial lawyer to review the lease and advise on any clauses that carry disproportionate risk. The review cost is a fraction of the potential exposure.
Prepare a condition report with photographs before you take possession. This protects you against unfair make-good claims at the end of the lease.
Understand your total occupancy cost. Add the base rent, outgoings, insurance, make-good provisions, and any other costs specified in the lease. This is the real cost of occupying the space and the number you should budget against.
Confirm whether the lease falls within the CT Act or operates under general contract law. The protections available to you depend on this classification.
Set calendar reminders for every critical date: option exercise deadlines, rent review dates, insurance renewal dates, and lease expiry. Missing a deadline can have irreversible consequences.
This kind of structured approach to commercial commitments aligns with the broader principle of having an essential legal checklist for your business setup that covers every significant obligation before it becomes a problem.
Frequently Asked Questions
What is the most important clause to review in a WA commercial lease?
The rent review mechanism typically has the greatest cumulative financial impact over the lease term. A fixed four per cent annual compound increase on a $50,000 starting rent adds more than $100,000 to the total rent paid over a ten-year term compared to a flat rate. Understanding the review type, modelling the compound effect, and negotiating caps or alternative mechanisms before signing can save tens of thousands of dollars.
What is a make-good clause and how much does it typically cost?
A make-good clause requires the tenant to return the premises to a specified condition at the end of the lease. This typically involves removing fixtures, fittings, and partitions, repairing damage, and in some cases, stripping the premises back to a base building shell. Costs range from $50 to $150 per square metre depending on the extent of the fit-out. For a 200 square metre office, this equates to $10,000 to $30,000. Negotiate a clear standard, consider a fixed dollar amount in lieu of physical reinstatement, and prepare a condition report at the start of the lease.
Can I negotiate the personal guarantee out of a commercial lease?
Complete removal of the personal guarantee is difficult in a tight market, particularly for newer businesses with limited trading history. However, you can negotiate to cap the guarantee at a defined amount rather than the entire remaining lease liability, time-limit the guarantee so it falls away after a period of reliable payment, require release of the guarantee on assignment of the lease, and offer a bank guarantee as an alternative that does not expose your personal assets to unlimited liability.
Does the Commercial Tenancy Act apply to my lease?
The Commercial Tenancy (Retail Shops) Agreements Act 1985 applies to retail shop leases in WA, which includes premises in shopping centres and premises predominantly used for retail sales or specified services. If your lease falls within the Act, you receive mandatory protections including disclosure requirements, restrictions on rent review mechanisms, and access to dispute resolution through the Small Business Commissioner. If your lease is for an office, warehouse, or industrial premises that does not meet the retail definition, it operates under general contract law with fewer protections.
How much does a commercial lease review cost in WA?
A professional lease review by a qualified property or commercial lawyer typically costs $1,500 to $4,000 in WA, depending on the length and complexity of the lease and the extent of negotiation required. This is a once-off investment that protects you for the duration of the lease. Given that the clauses reviewed can carry financial implications of tens or hundreds of thousands of dollars, the review cost represents a fraction of the potential exposure it helps you avoid or manage.
This guide is intended for general informational purposes only and does not constitute legal advice. WA commercial tenants should seek independent professional legal advice specific to their individual circumstances and lease before signing any commercial lease agreement.
