Heads of Terms for Commercial Leases in Australia: What to Check Before Signing

A lot can go wrong before a commercial lease is even drafted. Business owners often agree to heads of terms too quickly, assume the final lease will match what was discussed, or spend money on fitout and planning before the deal is properly documented. Those early mistakes can leave you stuck with higher rent, a longer term than expected, hidden outgoings, or a shop that does not actually suit your business.

A heads of terms review helps you catch those issues before you sign a lease and before you spend money on setup. It is the stage where you pressure test the commercial deal, confirm what has really been agreed, and spot any gaps that could become legal or financial problems later. If you are negotiating retail, office, warehouse or other business premises in Australia, this guide explains what heads of terms mean, what to check, where founders usually get caught, and which points are worth clarifying before the lease document lands on your desk.

Overview

Heads of terms are the main commercial points agreed in principle before the full lease is prepared. They are often short, but they can shape the lease negotiation in a very real way, especially once both sides start acting as though the deal is settled.

• the exact premises and permitted use
• lease term, option periods and any early exit rights
• rent, rent reviews, incentives and fitout contributions
• outgoings, utilities and who pays what
• make good, repairs and condition of the premises
• landlord works, approvals and fitout timing
• security requirements such as bonds or bank guarantees
• whether any clauses are intended to be binding
• special conditions, exclusivity, signage or storage rights
• whether the deal aligns with retail leasing laws, if those laws apply

What Heads of Terms Review Means For Australian Businesses

A heads of terms review is an early legal and commercial sense check on the lease deal before the formal lease is issued.

In practice, heads of terms might be called a proposal, offer to lease, leasing summary, letter of intent, or memorandum of understanding. The label matters less than the content. If the document records key promises, sets deadlines, and leads the parties to begin acting on the deal, it deserves careful review.

For Australian businesses, this stage matters because founders often make decisions based on the heads of terms well before the final lease arrives. You might order equipment, commit to fitout plans, negotiate finance, tell staff where the business is moving, or stop looking at other sites. Once that happens, your bargaining position can shrink quickly.

Not every heads of terms document is fully binding, but some parts can be. Confidentiality, exclusivity, payment of legal costs, access rights, and timetables can be expressly binding. Even where the main lease terms are stated to be non-binding, unclear drafting can still create arguments about what was agreed.

This is why a heads of terms review is not just a formality. It gives you a chance to confirm:

• whether the basic deal is commercially workable
• whether the document contains any binding obligations
• whether important points have been left vague or omitted
• whether the landlord's assumptions match your business model
• whether the eventual lease is likely to contain terms you did not expect

Why this matters before the lease is drafted

The lease usually follows the heads of terms, not the other way around. If a point is missing early, the landlord's lease draft may default to terms that suit the landlord.

That does not mean every detail must be settled at heads of terms stage. It does mean the major commercial and legal settings should be clear enough that you are not surprised later. This is especially important before you sign a lease for premises that need fitout, council approvals, landlord works, or a long commitment.

Retail lease or non-retail lease

The legal context can change depending on the type of premises and the state or territory. Many shopfront and customer-facing businesses fall within retail leasing legislation, which can affect disclosure, outgoings, rent review rules, recovery of certain costs, and procedural rights.

Office, industrial and warehouse leases may sit outside retail leasing legislation, depending on the use and local law. That makes the heads of terms review even more important, because the lease terms themselves often do more of the heavy lifting.

The key point is simple: before you sign, check what legal regime may apply and whether the proposed commercial terms fit that framework.

Legal Issues To Check Before You Sign

The main job at heads of terms stage is to make sure the business deal matches how you actually plan to occupy and use the premises.

Premises and permitted use

The description of the premises should be precise. Check the address, lot or suite details, storage areas, car spaces, loading access, and any common area rights you expect to use.

The permitted use needs equal attention. A broad description like “retail” or “office use” may not be enough if your business has a specific model. If you plan to provide services, sell food, store stock, offer classes, or use specialist equipment, that should be reflected properly.

If the use is too narrow, you may need landlord consent later for a business change. If the use is too broad, the landlord may resist once the lease is drafted. Before you sign, ask whether the use aligns with planning rules, centre rules, and any licence-style requirements relevant to your operations.

Term, options and exit flexibility

The lease term affects far more than rent. It shapes your long-term risk, your financing decisions, and your ability to adapt if the site does not perform.

Check:

• the initial term and any option periods
• when and how an option must be exercised
• whether any break right or early termination right exists
• what happens if approvals or fitout milestones are delayed
• whether the lease start date is fixed or linked to practical completion, handover or opening

This is where founders often get caught. A five-year commitment can start making financial sense only if the premises are delivered on time and in the agreed condition. If the heads of terms stay silent on delays, you may wear the risk.

Rent, reviews and incentives

Rent is rarely just a single number. You need to know the base rent, GST treatment, review method, review dates, and whether any incentive is documented clearly.

Common rent review methods include fixed percentage increases, CPI, market review, or a combination. Each has different effects over time. Market review clauses can also contain detailed assumptions and dispute procedures, so vague references at heads of terms stage can lead to friction later.

If the landlord is offering an incentive, record exactly what it is and when it is payable. That might include:

• a rent-free period
• a fitout contribution
• a cash incentive
• abatement during landlord works
• a contribution to services or relocation costs

Before you rely on an incentive, check whether it is conditional on opening by a certain date, not defaulting under the lease, or staying for the full term.

Outgoings and hidden occupancy costs

One of the biggest traps in commercial leasing is underestimating what sits on top of base rent.

Heads of terms should deal with outgoings clearly enough that you can model occupancy cost properly. That may include:

• council rates, water rates and land tax treatment
• building insurance
• strata levies or owners corporation charges
• cleaning, security and centre management costs
• utilities, air conditioning and after-hours charges
• promotional levies for shopping centres, if relevant

Retail leasing laws may restrict recovery of some costs in some circumstances, but you should not assume that every outgoing claimed by a landlord is recoverable or accurately estimated. Before you sign, ask for a clear breakdown and have the numbers checked against the proposed lease structure.

Fitout, landlord works and approvals

If your premises need fitout, timing and responsibility need to be nailed down early.

Check who is responsible for base building works, services upgrades, approvals, shopfront requirements, access for contractors, and defects rectification. If you are relying on the landlord to complete works first, the heads of terms should say what those works are and when they must be finished.

You should also check whether the lease is conditional on any approvals, such as development approval, building approvals, shopping centre approval processes, or franchisor sign-off if relevant to your business. If those approvals matter to your ability to trade, the heads of terms should not leave them to assumption.

Make good, repairs and condition

Make good obligations can create a large end-of-lease cost, especially where the premises need to be stripped back or restored.

Before you sign, check the starting condition of the premises and what you are expected to return at the end. If the premises are handed over in shell condition, warm shell, or partly fitted, that should be described properly. A condition report, photos, and written terms about existing defects can prevent arguments years later.

You should also clarify who handles structural repairs, services, air conditioning, fire systems, glass, and internal repairs. A short heads of terms document may not answer every maintenance issue, but it should not leave you with unrealistic assumptions either.

Security, guarantees and personal exposure

The landlord may ask for a bond, bank guarantee, director guarantee, or a combination. This affects cash flow and personal risk.

If you are signing through a company, check whether the landlord is also asking directors to guarantee the obligations personally. That can expose founders beyond the company itself. The heads of terms should state the proposed security clearly so you can assess whether it is commercially acceptable before the lease is drafted.

Assignment, subletting and business changes

A lease that works today may not work in two years. You might sell the business, bring in an investor, restructure, or need to sublease part of the space.

The heads of terms should flag any major restrictions on assignment, subletting, change of control, or sharing occupation. If those rights matter to your business plan, it is much easier to raise them before the formal lease appears.

What is binding and what is not

This point deserves a specific check every time. A heads of terms document should state clearly whether it is intended to be legally binding, non-binding, or partly binding.

If some clauses are meant to bind immediately, identify them precisely. That often includes confidentiality, exclusivity, access rights, deposits, legal costs, and dispute arrangements. If the document is intended to be non-binding except for certain clauses, that needs to be drafted cleanly. Otherwise, both sides may carry very different expectations into the lease process.

Common Mistakes With Heads of Terms Review

The most common mistake is treating heads of terms as a harmless summary instead of the blueprint for the lease.

Assuming the lease will sort out the details

Many tenants think they can deal with the finer points later. In reality, once the heads of terms are agreed, the landlord often sees the commercial deal as done.

If you raise major concerns only after the lease draft arrives, you may be told that the points were already settled or that the landlord will not move. That is why the right time to question rent review formulas, incentives, fitout timing, and make good is before you sign the heads of terms.

Relying on verbal promises

Business owners regularly hear helpful assurances during negotiations. The landlord or agent may say a contribution will be paid, storage will be available, signage will be approved, or a rent review will be “standard”.

If a point matters to your decision, it should appear in writing. Before you sign a contract, and before you spend money on setup, do not rely on a verbal promise that is missing from the document.

Missing the real occupancy cost

A premises may look affordable on the headline rent and become much less attractive once outgoings, utility charges, make good, and security requirements are counted properly.

This is especially risky for startups and growing SMEs managing cash flow tightly. A heads of terms review should test the full occupancy picture, not just the first rent figure shown on the page.

Ignoring timing risk

Timing problems can hurt as much as bad rent. If your opening depends on landlord works, approvals, or access for fitout, delay risk should be allocated clearly.

Founders often commit to suppliers, staff or marketing too early. If the premises are not ready, you may carry the cost while still being locked into the deal.

Overlooking personal guarantees

Directors sometimes focus on the company signing the lease and miss the guarantee requirement tucked into the heads of terms. That can expose personal assets if the business later struggles.

Even where a guarantee is commercially unavoidable, it is worth understanding the scope of that exposure and whether the amount or duration can be negotiated.

Not checking whether retail leasing rules apply

Some businesses sign early documents without asking whether the premises fall under retail leasing legislation. That can affect disclosure, costs, and some protections around the lease process.

You do not want to discover late in negotiations that assumptions about outgoings, fitout periods or landlord recovery rights were off target. The legal setting matters from the start.

Paying deposits or costs without clarity

Some heads of terms ask the tenant to pay a deposit, contribute to the landlord's legal costs, or reimburse preparation expenses. Those terms should be checked carefully.

Before you pay anything, confirm:

• what the payment is for
• whether it is refundable
• when it may be forfeited
• whether it is credited against rent or security
• what happens if the lease does not proceed

FAQs

Are heads of terms legally binding in Australia?

Sometimes. Many heads of terms are intended to be non-binding except for specific clauses such as confidentiality, exclusivity or payment obligations. The wording matters, so you should not assume the document has no legal effect.

Can I negotiate heads of terms before the lease is drafted?

Yes. That is usually the best time to negotiate the main commercial points because it is earlier, cheaper and often more practical than arguing over a long lease draft later.

What is the difference between heads of terms and a commercial lease?

Heads of terms set out the key deal points in principle. The commercial lease is the formal legal document that governs occupation of the premises in detail.

Should I sign heads of terms before I get legal advice?

It is usually better to get legal advice first, especially if the document contains deadlines, payments, exclusivity, or any binding wording. Early advice and a contract review can help you fix problems before they become harder to negotiate.

What should I do if the lease draft does not match the heads of terms?

Raise the inconsistency straight away and compare the documents line by line. Do not assume the difference is minor, because a change in outgoings, rent review, make good or guarantees can materially affect the deal.

Key Takeaways

• Heads of terms are often the practical blueprint for a commercial lease, even if the full lease is drafted later.
• A heads of terms review should confirm the premises, permitted use, term, rent, outgoings, incentives, fitout responsibilities, make good, security and any special conditions.
• Before you sign, check whether any part of the document is legally binding, including exclusivity, deposits, confidentiality or legal costs.
• Retail leasing laws may affect the deal depending on the premises and the state or territory, so the legal context should be checked early.
• Founders often get caught by vague incentives, underestimated outgoings, delay risk, verbal promises and director guarantees.
• It is usually easier and cheaper to negotiate key issues at heads of terms stage than after the formal lease has been prepared.

If you want help with lease negotiation, rent review and outgoings clauses, fitout and make good terms, landlord consent issues, or director guarantee risks, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.