Buying a business is an exciting step, but often, its success hinges on one critical component: the lease of the premises. When buying a business, understanding your rights and obligations under Australian lease law is essential for protecting your investment. At Citilawyers, we help ensure that your investment in buying a business is legally protected from day one.
Understanding Premises Ownership When Buying a Business
The first crucial step when buying a business is clarifying who owns the premises:
Leased Premises (Most Common)
If the business operates from rented premises, the lease will likely need to be assigned from the business vendor to you. This transfer must be carefully timed with the business settlement to avoid disruption.
Vendor-Owned Premises
If the vendor owns the property, you have two main options when buying a business:
- You may purchase the property under a separate contract; or
- Enter into a new lease directly with the vendor.
If buying a business involves a property transfer, settlement dates for both contracts must be aligned to avoid operational delays or legal exposure.
Lease Due Diligence Checklist for Buying a Business
Before you commit to buying a business, thorough lease due diligence is vital. Our legal team will guide you through a comprehensive review, focusing on:
Lease Validity: Is the lease current, enforceable, and properly executed or registered?
Remaining Term and Renewal Options: How much time is left on the lease, and are there any renewal options you can exercise?
Rent Review Mechanism: How will the rent increase over time? Are increases fixed, CPI-based, or subject to market reviews?
Outgoings: What additional costs (e.g., council rates, strata fees, insurance) will be passed on to you as the tenant?
Code Compliance: Does the property meet all current building codes, including fire safety and disability access?
Sustainability Obligations: Be aware of new legal obligations around energy efficiency, such as NABERS ratings, which can affect ongoing operational costs.
Assigning the Lease When Buying a Business
The process of transferring an existing lease typically involves:
- The vendor requests assignment approval from the landlord.
- The landlord reviews your financial capacity and tenancy history.
- Upon approval, a deed of assignment is signed, formally transferring the lease to you.
Unfair Contract Terms (UCT) Protection
If the lease is a standard-form commercial lease and your business qualifies as “small” (having ≤100 employees or ≤$10 million annual turnover), the lease is subject to the Unfair Contract Terms regime under the Australian Consumer Law (ACL).
Any unfair terms within that lease are now illegal and void. Landlords may also face penalties up to $50 million for including or enforcing such terms.
If these circumstances apply to you when buying a business, engage us to review the lease for unlawful clauses and help negotiate appropriate modifications.
Renegotiating Lease Terms
Before the lease is assigned during buying a business process, you may be able to renegotiate key terms to suit your commercial goals:
Pre-Assignment Variations
Seek favourable terms such as rent reductions, extended option periods, or caps on outgoings. Note that any variation costs are typically borne by the purchaser.
Negotiation Leverage
Given the current UCT laws and potential penalties for landlords, you have increased power to negotiate more balanced terms when buying a business.
When a New Lease is Required
Sometimes when buying a business, a lease assignment is not possible or advisable. A new lease may be necessary if:
- The existing lease is due to expire within 6 months, or
- The landlord refuses consent to the lease transfer.
When negotiating a new lease while buying a business, we can help you:
- Negotiate specific clauses, such as rent abatement provisions for future lockdowns (a key consideration in the post-COVID landscape).
- Limit liability for fit-out defects, protecting you from unexpected costs down the line.
- Ensure flexibility in early termination or subletting rights.
It is a good idea to do your research and speak to local real estate agents to help you benchmark local market rents effectively to ensure you’re getting a fair deal.
State-Specific Lease Updates
Laws on retail and commercial leases can vary across jurisdictions. Here are some recent key reforms by state:
| State | Key Update |
| NSW | Mandatory registration of retail leases within 3 months |
| VIC | Enhanced disclosure statements for retail tenants |
| QLD | Ban on “ratchet clauses” in market rent reviews |
Critical Lease Risks When Buying a Business
When conducting lease reviews while buying a business, make sure to identify and address the following common risks:
Personal Guarantees
Avoid unlimited personal exposure. We help cap liability or negotiate alternatives such as bank guarantees.
Make Good Clauses
These can be costly. We suggest you request detailed scopes and cost estimates up front to prevent disputes at lease expiry.
Hidden Costs
We’ll conduct a thorough audit of outgoing reconciliations from previous years to uncover any unexpected or excessive charges that could impact your bottom line.
Why Seek Our Legal Advice?
At Citilawyers, our team help you navigate the lease complexities involved in business purchases—protecting your investment and ensuring compliance with all relevant legislation.
Our services include:
- Lease Reviews to identify hidden liabilities or unfair terms
- Assignment Negotiations and lease variation advice
- Dispute Resolution with landlords or resolving any other lease-related disputes with business vendors.
- Compliance guidance under state-specific leasing legislation and national laws.
Many business sale disputes stem from lease issues, we can help you protect your investment with upfront due diligence.
If you’re purchasing a business and need assistance with leases, negotiation, or compliance, Citilawyers is here to assist. Contact our team today for a detailed lease risk assessment and tailored legal support.
