Lease Premiums Explained: What To Know Before Signing a Commercial Lease

Signing a commercial lease is a big moment for any business. It can be the step that gets you into the right location, helps you scale, and gives you a stable base to serve customers.

But there’s one cost that can catch business owners off guard, especially when you’re negotiating a “great spot” or taking over a lease from an existing tenant: a lease premium.

A lease premium can be completely legitimate. It can also be misunderstood, poorly documented, or used in a way that leaves you paying for “goodwill” you can’t actually protect. If you’re about to sign a commercial lease (or take an assignment of a lease), it’s worth understanding what a lease premium is, when it might apply, and what you should check before you hand over any money.

Below, we break it down in plain English, from a small business perspective, so you can negotiate confidently and avoid surprises.

What Is A Lease Premium?

A lease premium is an upfront payment you may be asked to pay to secure the right to a commercial lease.

In practice, it often comes up when:

• you’re taking over an existing tenant’s lease (an assignment or transfer of lease), and the tenant wants to be paid for giving up the lease; or
• the premises are in high demand and the landlord (or outgoing tenant) sees extra value in the lease beyond ordinary rent.

It can be described using different language depending on the deal, for example:

• “premium” or “lease premium”
• “key money” (common in retail leasing discussions)
• “goodwill payment” (sometimes incorrectly used)
• “fitout contribution” or “fitout sale” (where the outgoing tenant sells fixtures and equipment)

The key point is this: a lease premium is usually separate from your ongoing obligations under the lease (like rent, outgoings, and bond). It’s an additional upfront cost for access to the lease opportunity itself.

Lease Premium Vs Bond, Rent In Advance, And Fitout Costs

It’s easy to lump all the “upfront costs” into one bucket, but it helps to separate them:

• Bond (security deposit): money held (usually by the landlord) to cover damage, unpaid rent, or other breaches.
• Rent in advance: often your first month (or more) of rent paid upfront.
• Fitout costs: what you spend to build or customise the space for your business (or what you pay the outgoing tenant for an existing fitout).
• Lease premium: an extra payment for the “value” of being able to take the lease (not the same as buying physical assets).

When the documents are unclear, you can end up paying a “premium” without being sure what you’re actually getting. That’s why the paperwork matters.

When Might You Be Asked To Pay A Lease Premium?

You’re more likely to come across a lease premium in certain leasing scenarios.

1. Taking Over An Existing Lease (Assignment Or Transfer)

If an existing tenant is leaving before their lease ends, they may look for someone to “take over” the lease. This is usually done by assignment (the lease is transferred to you, with the landlord’s consent).

Sometimes the outgoing tenant has:

• negotiated favourable rent compared to today’s market rate;
• a long remaining term (or options) that makes the lease attractive;
• a strong location that’s hard to secure; or
• invested in a fitout that a new tenant could use.

They may then ask you to pay a lease premium to step into their position.

In this situation, it’s also common to see a separate document dealing with the transfer process, such as a deed. If you’re going through an assignment, it’s worth having the Deed of Assignment of Lease reviewed so the risk and responsibilities are clear.

2. High-Demand Retail Locations

Prime retail sites (think high-foot-traffic strips, shopping centres, or tightly held precincts) can attract premiums because the opportunity is scarce.

In retail leasing specifically, an upfront payment can raise “key money” concerns (more on that below). Even if it’s presented as “normal market practice”, it’s still important to understand what’s legally allowed in your state or territory, and what the payment is actually for.

3. Where The “Value” Is Really The Existing Business (Not The Lease)

Sometimes what you’re effectively paying for is not the lease, but the existing business operating from that location (including customer base, brand reputation, and online reviews).

That’s a different transaction: a business purchase rather than just a lease deal. In that case, you’ll want the sale and lease components properly separated, documented, and negotiated, so you don’t accidentally pay “business value” without getting the protections that normally come with buying a business.

For example, if you’re buying a business and also taking over the lease, you might need an Asset Sale Agreement (or other appropriate sale documents) in addition to the lease/assignment documentation.

Is A Lease Premium Legal In Australia?

Whether a lease premium is lawful depends heavily on the context, the state or territory, and whether the lease is covered by retail leasing legislation.

In plain terms: in some commercial leasing situations a premium can be permissible, but in other situations an upfront payment can cross into “key money” territory and create compliance issues. Because the rules and definitions vary between jurisdictions, it’s worth getting advice on your specific lease before you pay anything.

Lease Premiums In Retail Leasing (Key Money Risk)

If your lease is a retail lease (for example, premises used for retail sale of goods/services to the public), you need to be especially careful.

Retail leasing laws in many states and territories restrict or prohibit landlords and their agents from demanding or accepting “key money”. “Key money” is broadly an amount paid as a condition of granting, renewing, extending, or assigning a retail shop lease, beyond legitimate costs - but the exact definition, exceptions, and remedies differ depending on where the premises are located.

This is one reason it’s important to identify early:

• is this a retail lease or a general commercial lease (under the legislation in your state/territory)?
• who is receiving the payment (landlord, agent, outgoing tenant, or a related party)?
• what is the payment actually for, and is it documented as such?

For example, if you’re leasing in NSW and the lease falls under the relevant retail leasing regime, you may also want to understand how the Retail Leases Act NSW framework can affect payments, disclosures, and negotiation dynamics. Other states and territories have their own retail leasing legislation and rules.

Lease Premiums Paid To An Outgoing Tenant

Payments to an outgoing tenant can be structured in different ways. For example, it might be a payment for:

• fixtures and fittings (a fitout sale);
• equipment; or
• the outgoing tenant’s “value” in the lease (premium).

Even where the payment is going to the outgoing tenant (not the landlord), you still need to be careful. Depending on the jurisdiction and whether the arrangement is connected to the grant or assignment of a retail lease, it may still raise “key money” issues or other compliance risks. You also need to consider what the landlord requires, what consents are needed, and whether any retail leasing laws restrict how the arrangement is structured.

The safest approach is to ensure the payment is clearly documented, with a clear description of what you receive in exchange, and how it interacts with the lease and any assignment documents.

Why “Handshake Premiums” Are Risky

A lease premium paid informally (for example, via a quick invoice with vague wording like “premium for shop”) can create problems later, including:

• difficulty enforcing what you thought you were paying for;
• uncertainty if there is a dispute about the lease transfer;
• issues if the landlord refuses consent or imposes conditions; and
• complications when you later try to sell your business or assign the lease.

If there’s money changing hands, it’s worth making sure the legal documents match the commercial reality.

What You Should Check Before Agreeing To A Lease Premium

If you’re being asked to pay a lease premium, you don’t necessarily need to walk away. But you should slow down and treat it like a mini due diligence process.

1. What Exactly Are You Paying For?

Ask the direct question: what do I receive in return for this payment?

Is it:

• a right to take an assignment of the lease (subject to landlord consent)?
• a right to buy the outgoing tenant’s fitout and equipment?
• part of a broader business sale (goodwill, customer database, phone number, social accounts)?

Be cautious with vague answers like “it’s just how it works” or “it’s for the location”. Location value can be real, but you still want the documents to be clear on what happens if the deal falls over.

2. Is The Lease (And Any Options) Actually Transferable To You?

Most commercial leases require landlord consent to assign. Some have strict conditions, including:

• financial checks and references;
• a requirement for you to provide personal guarantees;
• payment of the landlord’s legal costs; and
• the outgoing tenant remaining liable (in some cases) if you default.

If you pay a lease premium before consent is confirmed, you need clear terms about refunds or what happens if the landlord says no.

3. Are You Comfortable With The Remaining Term, Rent Review Clauses, And Outgoings?

It’s surprisingly common for a tenant to pay a lease premium and then discover the lease itself isn’t commercially workable.

Before you agree to any premium, check:

• Remaining term: how long is left on the lease, and what options exist?
• Rent increases: are reviews fixed, CPI-based, market review, or something else?
• Outgoings: what operating costs are you expected to pay (and are they capped or estimated)?
• Permitted use: can you legally run your business from the premises?
• Make good: what condition must you return the premises in at the end?

These clauses can materially affect whether the lease is worth any “premium” at all.

At this stage, it’s common to have the lease reviewed (and sometimes negotiate amendments) before you commit. Many business owners do this through a structured Commercial Lease Review.

4. Are You Also Buying A Business (And Its Goodwill)?

If the outgoing tenant is asking for a premium because the site is established (for example, “people come here for coffee already”), you may actually be looking at a business purchase scenario.

That matters because goodwill and business assets should usually be dealt with in a business sale agreement, not hidden inside a “lease premium”.

When you buy a business, you typically want clarity on things like:

• what assets are included (equipment, stock, IP, website, phone number);
• staff arrangements (if any);
• handover period and training; and
• restraint clauses to stop the seller immediately setting up next door.

If you’re going down this path, you may want a proper Business Sale Agreement so the value you’re paying for is actually protected.

5. How Is The Payment Documented (And What If The Deal Doesn’t Complete)?

This is one of the biggest practical risks with a lease premium: paying money and then not ending up with the lease.

Before you pay anything, you should understand:

• is the premium refundable if landlord consent isn’t granted?
• is it held in trust/escrow pending completion, or paid immediately?
• what are the conditions for completion, and who controls whether they’re met?
• are there any “cooling off” rights (often there aren’t in commercial deals)?

A well-drafted deed or agreement can deal with these points clearly, and that can make a huge difference if something goes wrong.

Practical Tips For Negotiating A Lease Premium (Without Getting Burnt)

Commercial leasing is often negotiable. Even when the other side says it isn’t, there are usually parts of the deal that can be adjusted to reduce your risk.

Negotiate The Structure, Not Just The Amount

If you can’t reduce the lease premium itself, consider negotiating:

• Payment timing: pay only on completion, not upfront.
• Conditional payment: payment is conditional on landlord consent and execution of all documents.
• Allocation: allocate part of the payment to tangible assets (fitout/equipment) if that reflects reality (and document it properly).
• Warranties: warranties from the outgoing tenant about the condition/ownership of the fitout and equipment.

Match The Paperwork To The Reality

If you’re paying for equipment, make sure there’s an itemised list and clear transfer terms.

If you’re paying for goodwill or IP (like a trading name, logo, domain, or social media accounts), make sure the documents reflect that. IP transfers and usage rights are not automatic just because you take over a lease.

And if the lease needs adjusting (for example, adding a more suitable permitted use or fixing an unworkable make good clause), it’s usually far better to negotiate it before you pay a lease premium.

Think Ahead To Your Exit Plan

Even if you’re excited about the location now, you should think about how you’ll exit later. Ask yourself:

• Can you assign the lease if you sell your business?
• Are there conditions that make assignment difficult?
• Will you be able to recover some value (including any premium) on exit?

A lease that looks fine today can become a problem if it’s too restrictive or expensive to transfer later.

Don’t Forget The Operational “Must-Haves”

Lease negotiations often focus on money, but make sure the lease also supports how you actually run your business.

For example:

• Do you need signage rights?
• Do you need exclusivity (so the landlord can’t lease next door to a direct competitor)?
• Do you need permissions for renovations or a fitout?
• Are there trading hour obligations (common in some retail settings)?

These aren’t just “nice to haves”. If they’re missing, the lease may not suit your business no matter how good the location is.

Key Takeaways

• A lease premium is an upfront payment you may be asked to pay to secure a commercial lease opportunity, often when taking over an existing lease or entering a high-demand site.
• Not all upfront payments are the same: a lease premium is different from a bond, rent in advance, and fitout costs, so you should be clear on what you’re paying for.
• Retail leasing rules can restrict “key money”, but the details vary by state and territory - so it’s important to confirm whether your lease is a retail lease and whether the payment structure is compliant in your jurisdiction.
• Before paying any lease premium, check the lease terms carefully (rent reviews, outgoings, permitted use, make good, and assignment conditions) to confirm the lease is commercially workable.
• If the premium is really payment for an established business (goodwill/assets), you’ll usually need separate sale documents so your purchase is properly protected.
• The safest approach is to ensure the lease premium is documented clearly, with conditions and refund mechanics if the deal doesn’t complete.

If you’d like help reviewing a commercial lease, negotiating a lease premium, or handling an assignment of lease, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.