Commercial Property. Explained. | A CBRE Private Wealth series

By Ingrid Filmer
Senior Managing Director, Capital Markets – Private Wealth, CBRE

A long lease is one of the things buyers love about commercial property. It can provide certainty of income and reduce near-term vacancy risk. But lease length is also one of the most commonly misunderstood parts of a commercial property sale.

The classic example is a lease advertised as 10 + 10 + 10 years. At first glance, that can look like 30 years of income. It is not. To understand what you are really buying, you need to separate the firm term from the options, understand when those options can be exercised, know how the rent is reviewed and work out whether the tenant is actually likely to stay.

Start with the dates, not the headline
There is no single shorthand convention used consistently across commercial property advertising. A property may be described as having a 10-year lease because that was the original term, even though the lease commenced eight years ago and only two years remain. Another campaign may lead with the total possible term, including options.

So find the commencement date and the current expiry date first. If a 10-year lease commenced in 2018, buying the property in 2026 does not give you 10 years certain. It gives you the remaining two years, plus whatever options still exist. That distinction can materially change the risk and the value of the investment.

Firm term and options are different
A lease written as 10 + 10 + 10 may have the potential to run for 30 years, but the tenant is generally only committed to the first 10 years. The next terms are options, and those options usually belong to the tenant.

You cannot force a tenant to exercise an option because you would like another 10 years of rent. Equally, if the tenant validly exercises an option, the landlord is usually bound to grant that further term. That means an option can be valuable to the investor, but it is not the same as guaranteed income.

I look at the firm term first. Then I ask how likely the tenant is to exercise the option and what happens to the rent if they do.

The option date can sneak up on you
Every lease will say how and when an option must be exercised. Depending on the lease, the tenant might be able to wait until three, six or 12 months before expiry. Retail leasing legislation can also change the process.

That matters because a landlord can be much closer to the end of a lease than expected before knowing with certainty whether the tenant is staying. Read the option clause, diary the date and understand exactly how notice must be given. In some leases, strict timing matters. Never assume a missed date can simply be fixed later.

Then ask what happens to the rent
An option usually creates a rent question as well as a new term. The first year’s rent might be a fixed increase, CPI, a stated amount or a market review.

A market review can work in the landlord’s favour if the property is under-rented. But it can also work against the landlord if the passing rent has grown above market. A lease with 4 per cent fixed increases for many years can look fantastic until market rent is tested and a valuer concludes a new tenant would pay less.

Long leases can also contain mid-term market reviews, even when no option is being exercised. So do not assume that a long lease means the rent simply keeps increasing in a straight line.

Retail legislation can change what the lease appears to say
If the lease is covered by retail leasing legislation, the legislation can override parts of the document. One important example is a ratchet clause, which is designed to let rent move up to market but stop it moving down. Several jurisdictions make those clauses ineffective for covered retail leases.

Some states also let the tenant find out the likely market rent before deciding whether to exercise an option. That is commercially important because the tenant can make the stay-or-go decision with much more information.

If the lease is not covered by the relevant retail leasing legislation, the wording of the lease becomes even more important, subject to other applicable laws. For a buyer, the question is always both: what does the lease say, and what legislation applies to it?

A simple state-by-state snapshot

The table below is a simplified investor guide to market-rent reviews and options where the relevant retail leasing legislation applies. Retail Acts do not cover every commercial lease, and exclusions and exceptions matter.

Jurisdiction	Retail leasing law	Key option / market review point
Victoria	Retail Leases Act 2003	Market-review ratchets that prevent a decrease are generally void. For an option at market rent, the tenant can seek an early review after the landlord gives the statutory option notice. A 14-day cooling-off right can also apply after exercise if no early review was requested.
NSW	Retail Leases Act 1994	A clause preventing or limiting a decrease on a review that can reduce rent is void. A tenant can generally seek early market-rent determination 6 to 3 months before the option deadline, then has 21 days to exercise after determination.
Queensland	Retail Shop Leases Act 1994	Ratchet clauses are generally void for covered leases, subject to special major-lessee rules. Early market-rent determination is generally available 6 to 3 months before the option deadline for leases over one year.
South Australia	Retail and Commercial Leases Act 1995	A clause preventing a market-rent decrease is void. A tenant can generally request early determination between 6 and 2 months before the option deadline.
Western Australia	Commercial Tenancy (Retail Shops) Agreements Act 1985	On a market review, rent must be able to rise or fall to market and ratchet clauses are void. The Act regulates the valuation process, but does not provide the same pre-option early-determination window as several eastern jurisdictions.
Tasmania	Retail Leases Act 2022	A clause preventing or limiting a market-rent reduction is generally void. For an option at market rent, the tenant can request the proposed rent 4 to 6 months before the option exercise period expires.
ACT	Leases (Commercial and Retail) Act 2001	Discretionary review clauses are void and review dates must be identifiable. If market rent is disputed and the parties cannot agree, the Act provides a mediation and valuation pathway.
Northern Territory	Business Tenancies (Fair Dealings) Act 2003	Ratchet clauses are prohibited for covered retail leases. A tenant can generally request early market-rent determination 6 to 3 months before the option deadline.

 

How likely is the tenant to stay?
This is where the legal document meets the real world. Look at the tenant’s relationship with the property. Is the site trading well? Has the tenant invested heavily in its fit-out? Would moving be expensive or disruptive? Is the location strategically important to its network?

Then visit the property. Is the store busy? Is the tenant maintaining the premises? Are they refurbishing? If the lease allows the landlord to receive sales information, understand what those figures are telling you. And speak to the tenant where appropriate.

A fast-food operator that has spent heavily on a drive-through on a strategic corner may have a powerful reason to stay. A retailer in an interchangeable shop with declining sales may not. Options are more valuable in practice when the tenant has a strong commercial reason to exercise them.

Remember, an option can restrict the landlord too
Buyers naturally think of options as a benefit, but the right usually belongs to the tenant. If you are buying because you want to redevelop, expand, change the use or occupy the property yourself, an option can become a major constraint. If the tenant validly exercises it, you may be locked into another term.

So if your strategy depends on getting the property back, check the option position before you buy. The same applies to rent. If you are counting on a market review to lift an under-rented property, make sure the lease and the legislation actually support that outcome.

Why an exercised option can create value
When a strong tenant exercises an option and commits to a new term, the investment can suddenly look much more secure. Yesterday there may have been six months remaining. Today there may be another five or 10 years certain.

That can materially change how buyers view the property because near-term vacancy risk has reduced. It is one reason owners often think carefully about sale timing around major lease events.

But do not look at lease length in isolation. A new 10-year term at an unsustainable rent is not automatically better than a shorter lease at a strong market rent.

My rule for buyers

• When you see a long lease advertised, do not simply ask, ‘How long is the lease?’ Ask four separate questions.
• When did the current term start? When does the firm term expire? What options remain and who controls them? What happens to the rent if an option is exercised?
• Then ask the most practical question of all: does this tenant have a good reason to stay?
• A 10 + 10 + 10 lease can be an excellent feature. It just is not automatically a 30-year guarantee. Commercial property becomes much easier when you stop reading the headline and start asking the right questions.

Important: This article is general educational information only. Retail leasing laws differ by jurisdiction and do not apply to every commercial lease. Lease wording, property type, tenant and statutory exclusions can change the outcome. Obtain legal advice on the specific lease before buying.

Commercial property does not need to feel too hard. Follow the series and let’s demystify it together.