Understanding Your Lease: Key Terms Explained

Net Face Rent vs Effective Rent

Net face rent is the headline rental rate quoted in $/sqm per annum. It's the starting point for comparison but doesn't tell the full story.

Effective rent accounts for incentives, rent-free periods, and fitout contributions. It represents the true cost of occupancy over the lease term and is the number you should focus on when comparing deals.

Outgoings

Outgoings are the operating costs of the building that are passed on to tenants. They typically include council rates, water rates, insurance, management fees, and common area maintenance. In Australia, outgoings usually add $80–$180 per sqm per year on top of your net rent.

Incentives

Incentives are the landlord's contribution to attract and retain tenants. They can take several forms:

• Rent-free periods: A number of months where no rent is payable (e.g., 6 months free on a 5-year lease = 10% incentive).
• Fitout contributions: Cash or works provided by the landlord to help you set up the space.
• Reduced rent: A lower rent for the first year or two that steps up over the term.
• Cash incentives: A lump sum payment on lease commencement.

Lease Term and Options

A lease term is the initial fixed period (typically 3–10 years in Australia). An option gives you the right (but not the obligation) to extend the lease for a further period at pre-agreed terms.

Longer leases generally attract better incentives and give you certainty, but reduce flexibility. Shorter leases preserve optionality but may come with higher rent and fewer incentives.

Make-Good Obligations

A make-good clause requires you to return the premises to its original condition at the end of your lease. This can be expensive — often $200–$500/sqm — so it's important to negotiate the scope of make-good upfront.

Strategies include negotiating a make-good cap, requesting a landlord waiver if the next tenant will use your fitout, or agreeing to a "make-good payment" instead of physical works.

Rent Reviews

Most leases include periodic rent reviews (annually or bi-annually). Common types include:

• Fixed increase: e.g., 3.5% per annum — provides certainty but may outpace market movement.
• CPI: Linked to inflation — generally tenant-friendly in low-inflation environments.
• Market review: Rent is adjusted to current market rates — can go up or down (though "ratchet" clauses may prevent decreases).