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Glossary of commercial lease terms

The definitions of common commercial lease terms.

Disclosure statement

A list of information, as required under the Act, that lessors and lessees must sign before entering into the lease. There are two parts to the Disclosure Statement: (i) Part A, known as the Lessor’s Disclosure Statement, which is signed by the lessor and must be provided to the lessee at least seven days before the commencement of a lease; and (ii) Part B, known as the Lessee’s Disclosure Statement, which is signed by the lessee and must be provided to the lessor within seven days after receipt of Part A.  

Lessee

The tenant of the leased premises, usually the occupier and business operator. If there is a sub-lessee that occupies the premises, then the lessee may also be known as the “head lessee” or “head tenant”, and also be known as a “sub-lessor”.

Lessor

A lessor (also referred to as a landlord or property owner) is usually the owner of the leased premises, who grants a lease to the lessee (tenant).

Hold over

You are on "hold over" if you continue to occupy the premises after the expiry of the fixed term where the lessor has not taken action to end the lease. Leases often give the lessee an opportunity to "hold over" under the lease and stay in the premises on a month-to-month basis. Under this arrangement either party can terminate the lease with one month’s notice. 

Make good

The obligation of a lessee at the end of their lease to ensure that their premises are returned to the condition it was first built, the same condition as at the start of the lease, or some other condition as specified in the lease. For example, the make good obligations may include re-painting or restoring partitions. Note: "cold shell" or "warm shell" are sometimes used in shopping centres, where you may need to take all services back to capped points, and install hoarding when the shopfront is removed. 

Mediation

A confidential process in which the participants, with the support of the mediator, identify issues and commercial interests, develop options, consider alternatives and make decisions about future actions and outcomes. The mediator acts as a neutral third party to support participants to reach their own decision. Mediation is a cost-effective way to settle disputes. The NSW Small Business Commission provides commercial mediation services. 

Option (option to renew or extend) 

Typically an option in a lease is a right for the tenant to call for a new lease with the same terms as their current lease, for a new fixed period of years, removing (striking out) the option that was used, and resetting the rent by a specified method. An option in a lease usually means an extra period that the lessee has the right to occupy the premises, in addition to the initial fixed term of the lease. For example, a lease with an initial fixed term of two years may have two options which will allow the lessee to stay for a further three years each – 2 + 3 + 3 – a total of 8 years. A lessee may choose whether to ‘exercise’ or take up an option. Any option should be documented in the lease (in writing). The deadline for exercising an option is usually some months prior to the end of the lease (not the last day of the lease). If you miss that deadline, you lose the option. 

Outgoings

This commercial leasing term usually relates to the costs incurred by the lessor in operating and maintaining the leased premises which are often agreed to be paid by by the lessee. As such these are usually referred to as ‘lessor outgoings’ (i.e. separate to outgoings of the business itself). Outgoings are negotiated between the lessor and lessee and should be outlined in the lease. Examples may include council and water rates, repairs and maintenance and management fees. The Retail Leases Act 1994 (NSW) impacts on what outgoings may be charged to the lessee, how they are disclosed, and audited.

Fixed term

The duration of the fixed term of the lease, being the minimum amount of time that a lessee may remain at the premises. A lease agreement may also provide options to renew or extend the lease term.