When you buy a commercial property, you are not just buying a building. You are buying an income stream, and that income stream is defined almost entirely by the lease. The type of lease in place determines who pays for what, how predictable your returns will be, and how much management the property requires. Understanding lease structures is therefore not optional knowledge for commercial investors — it is foundational.
This guide covers the four main lease types used in Australian commercial property, explains how to read a lease summary, identifies common red flags, and helps you match the right lease structure to your investment goals.
The lease is the investment. Two identical buildings on the same street can produce vastly different returns depending on the lease structure, the tenant, and the rent review mechanism in place.
1 Why Lease Structure Matters
In residential property, your return is largely a function of the property itself — its location, condition, and the local rental market. In commercial property, the lease transforms the equation entirely. A well-structured lease with a strong tenant can make an average building an excellent investment. A poorly structured lease can make a prime building a liability.
The lease determines three critical things for an investor:
- Income predictability. How certain is the rent you will receive, and how does it grow over time? Different lease types allocate cost risk differently between landlord and tenant, which directly affects your net income stability.
- Management burden. Some lease types require the landlord to manage outgoings, maintenance, and building services. Others transfer virtually all operational responsibility to the tenant. Your appetite for active management should influence which lease type you prefer.
- Yield calculation. The distinction between gross and net yields is meaningless without understanding the lease structure. A property advertised at a 7% yield on a gross lease is a fundamentally different proposition to a 7% yield on a triple net lease, because the outgoings exposure is entirely different.
2 Gross Lease
Under a gross lease, the tenant pays a single, fixed rental amount and the landlord is responsible for all property outgoings. These outgoings typically include council rates, water rates, land tax, building insurance, common area maintenance, and structural repairs.
Where gross leases are common
Gross leases are most frequently found in office buildings, particularly multi-tenanted office properties where shared services and common areas make it impractical to allocate individual outgoings to each tenant. They are also common in smaller commercial suites and some co-working or serviced office arrangements.
Advantages for investors
- Simpler tenant relationships. The tenant pays one amount; the landlord manages everything else. This can reduce disputes about outgoing allocations and service levels.
- Higher gross rental. Because the tenant is paying an all-inclusive rent, the gross rental figure is higher, which can make the property easier to finance (lenders assess rental income).
- Tenant retention. Tenants often prefer the simplicity and cost certainty of a gross lease, which can support lower vacancy rates.
Risks for investors
- Outgoings exposure. If council rates, insurance premiums, or maintenance costs rise faster than your rent reviews, your net income shrinks. You bear the full risk of cost escalation.
- Harder to calculate true net yield. You need to accurately forecast outgoings to understand your real return, and those outgoings can be volatile — particularly insurance and maintenance on older buildings.
- Deferred maintenance temptation. Because outgoings come directly from the landlord's pocket, there is a natural temptation to defer non-urgent maintenance, which can create larger capital expenditure problems down the track.
3 Net Lease
A net lease requires the tenant to pay a base rent plus some or all of the property's outgoings. In Australia, the most common form is a net lease where the tenant pays base rent plus outgoings such as council rates, water rates, and building insurance, while the landlord retains responsibility for structural repairs and sometimes land tax.
Where net leases are common
Net leases are prevalent in retail properties, standalone commercial buildings, and some suburban office assets. They are particularly common in strip retail, where individual tenants occupy discrete premises and outgoings can be clearly attributed to each tenancy.
Advantages for investors
- Partial outgoings recovery. By passing through some costs to the tenant, the landlord's net income is more predictable and less vulnerable to cost increases in the recovered categories.
- Clearer net yield. Because a meaningful portion of outgoings is recovered, the gap between gross and net yield is smaller and easier to forecast.
- Balanced risk. The net lease sits between a gross lease and a triple net lease in terms of landlord responsibility, making it suitable for investors who want some cost protection without transferring all maintenance risk to the tenant.
Risks for investors
- Residual outgoings. The landlord still bears responsibility for outgoings not passed through — typically structural maintenance, capital works, and sometimes land tax. These can be significant and unpredictable.
- Outgoings disputes. Tenants may challenge outgoing recoveries, particularly if they believe costs are unreasonable or not properly apportioned. Clear lease drafting is essential.
- Management overhead. The landlord still needs to manage the building, arrange insurance, coordinate maintenance, and administer outgoings recovery — which requires time or a managing agent.
4 Triple Net Lease (NNN)
A triple net lease — often abbreviated as NNN — transfers virtually all operating costs and responsibilities to the tenant. The tenant pays base rent plus all outgoings: council rates, water rates, land tax, building insurance, routine maintenance, structural repairs, and sometimes even capital works. The landlord receives a clean net income with minimal ongoing obligations.
Where triple net leases are common
Triple net leases are the standard in industrial and logistics properties, particularly for single-tenant warehouses, distribution centres, and manufacturing facilities. They are also common in large-format retail, standalone fast-food outlets, and purpose-built commercial premises leased to national tenants.
Why investors favour triple net leases
- Passive income. The landlord's role is reduced to collecting rent and monitoring lease compliance. There are no outgoings to manage, no maintenance to coordinate, and no unexpected repair bills.
- Income certainty. What you see is what you get. The rent the tenant pays is your net income, minus only your own financing costs, land tax (if not recovered), and advisory fees.
- Simplified analysis. Because the tenant bears all operating costs, the capitalisation rate and yield calculations are straightforward. There is no need to estimate and deduct outgoings.
- Lower management costs. With no outgoings to administer, the need for a property manager is reduced or eliminated, which further improves your net return.
Risks for investors
- Tenant covenant is everything. Because the tenant is responsible for maintaining the building, a weak or financially distressed tenant may neglect maintenance, leaving you with a deteriorated asset at lease expiry.
- Make-good risk. If the tenant vacates and the make-good clause is poorly drafted or the tenant lacks the financial capacity to honour it, the landlord may inherit a building that requires significant capital expenditure to re-lease.
- Lower gross rent. Triple net rents are lower than gross rents on a per-square-metre basis, because the tenant is bearing all costs separately. This can affect loan-to-value ratios and financing terms.
- Concentration risk. Most NNN properties are single-tenant assets. If that tenant defaults or vacates, income drops to zero immediately — there is no diversification across multiple tenancies.
A triple net lease with a strong tenant on a long term is the closest thing to a bond that commercial property offers. But like a bond, your return is entirely dependent on the counterparty's ability to pay.
5 Percentage Lease
A percentage lease combines a base rent with a variable component tied to the tenant's gross turnover. Once the tenant's revenue exceeds an agreed threshold (known as the breakpoint or natural breakpoint), the landlord receives an additional payment calculated as a percentage of turnover above that threshold.
Where percentage leases are common
Percentage leases are predominantly used in retail, particularly in shopping centres, malls, and high-street retail strips. They are standard practice for major shopping centre landlords and are increasingly used in food and beverage precincts, entertainment venues, and mixed-use retail environments.
Advantages for investors
- Upside participation. If the tenant's business thrives, the landlord shares in that success through higher rental income. This creates alignment between the landlord's and tenant's interests.
- Inflation hedge. Because revenue tends to rise with inflation, the percentage component provides a natural hedge against rising costs — potentially more effective than fixed or CPI-linked rent reviews.
- Tenant viability signal. Regular turnover reporting gives the landlord visibility into the tenant's trading performance, providing early warning of financial distress.
Risks for investors
- Income volatility. The variable component means rental income fluctuates with the tenant's trading performance. In downturns, your income may be limited to the base rent only.
- Reporting reliance. You are dependent on the tenant accurately reporting their gross turnover. Audit rights should be built into the lease, but disputes over revenue attribution and reporting methodology are common.
- Structural retail shifts. The growth of online retail can reduce in-store turnover even for otherwise healthy businesses, which directly reduces the percentage rent component. A tenant may be profitable overall but generating less in-store revenue than their lease anticipates.
- Complex valuation. Properties with percentage leases are harder to value because the income stream has a variable component. This can affect financing, as lenders may discount the percentage rent when assessing serviceability.
6 How to Read a Lease Summary
When evaluating a commercial property, the lease summary (sometimes called the lease schedule or tenancy schedule) is the first document you should review. It distils the key commercial terms of each lease into a format that allows quick comparison and analysis. Here are the critical metrics to understand.
WALE (Weighted Average Lease Expiry)
WALE measures the average remaining lease term across all tenancies, weighted by either income or area. A property with a WALE of 7.5 years by income means that, on average, the leases have 7.5 years remaining — with higher-rent tenancies contributing more to the calculation. A longer WALE generally indicates greater income security.
Be cautious about how WALE is presented. WALE by income and WALE by area can differ significantly if the largest tenant (by area) is on a low rent or a short lease. Always check both figures.
Net yield versus gross yield
The gross yield is the total rental income divided by the purchase price. The net yield deducts all non-recoverable outgoings from the income before dividing. On a triple net lease, the gross and net yields are very close. On a gross lease, the gap can be substantial — sometimes 1.5 to 2.5 percentage points.
Always compare properties on a net yield basis. A property advertised at an 8% gross yield with significant non-recoverable outgoings may deliver a lower net return than a property advertised at a 6.5% net yield on a triple net lease.
Rent review mechanisms
There are three common rent review types in Australian commercial leases:
- Fixed increases. The rent increases by a set percentage (commonly 3% to 4%) at each review date. This provides certainty for both parties but may result in over-renting or under-renting relative to the market over time.
- CPI-linked reviews. The rent adjusts in line with the Consumer Price Index. This tracks inflation but can produce very low increases in low-inflation environments, and provides no protection if the market moves significantly above CPI.
- Market reviews. The rent is reset to the prevailing market rate, as determined by a valuer or by agreement between the parties. Market reviews carry the risk that the rent could decrease if the market has softened, but they also ensure the rent stays aligned with current conditions.
Many leases use a combination — for example, fixed 3.5% increases annually with a market review every three years. Understanding the review structure is essential to forecasting future income.
7 Red Flags in Commercial Leases
Not every lease is a good lease, regardless of the headline rent. When reviewing a commercial property acquisition, watch for these warning signs.
- Short WALE with no options. A lease with less than two years remaining and no options to renew means you are buying vacancy risk. You may need to re-lease the property — possibly at a lower rent, possibly after a period of vacancy, and almost certainly after spending on incentives or refurbishment to attract a new tenant.
- No rent reviews or CPI-only reviews. A ten-year lease with no rent reviews locks in today's rent for a decade. Even CPI-only reviews can result in the rent falling significantly below market over a long lease term, which erodes your return in real terms.
- Tenant break clauses. A break clause (also called an early termination right) allows the tenant to end the lease before the expiry date, usually with a notice period. While not inherently problematic, a break clause in a single-tenant property fundamentally changes the risk profile. The effective lease term is not the expiry date — it is the break date.
- Weak or absent make-good provisions. At lease expiry, the tenant should be required to return the premises to an agreed condition. If the make-good clause is vague, unenforceable, or absent, you may inherit a building stripped of fixtures, damaged by the tenant's use, or requiring significant reinstatement before it can be re-leased.
- Personal guarantees (or lack thereof). When a tenant is a company — particularly a proprietary limited company — the lease may be worthless if the company is wound up. A personal guarantee from a director provides an additional layer of security. If there is no personal guarantee behind a small or single-purpose company tenant, the landlord's recourse in the event of default is limited to the company's assets, which may be negligible.
- Unusual permitted use clauses. A very narrow permitted use clause can limit your ability to re-lease the property if the tenant vacates. A very broad clause may allow the tenant to operate a business that degrades the premises or conflicts with other tenancies. Review the permitted use carefully and consider how it affects re-leasing prospects.
- Deferred or outstanding rent reviews. If a rent review has been triggered but not completed, or if the parties have been unable to agree on a market review, there may be a back-dated rental adjustment owing. This can work in your favour (if the review results in an increase) or against you (if it has been deferred because the market has softened).
The best time to identify a lease problem is before you sign the contract. The worst time is after settlement, when your negotiating position has disappeared entirely.
8 Which Lease Type Suits Which Investor
Different lease structures suit different investment strategies and risk appetites. There is no universally "best" lease type — only the one that aligns with your objectives, your capacity to manage the property, and your tolerance for variability in returns.
The passive investor
If your priority is stable, predictable income with minimal management involvement, a triple net lease with a strong tenant on a long term is the natural fit. Industrial and logistics assets leased to national or listed tenants on NNN terms offer the closest experience to collecting a coupon from a bond. The trade-off is that yields on these assets tend to be compressed, reflecting the lower risk profile.
The hands-on investor
If you are willing to actively manage a property — coordinating maintenance, managing outgoings, and engaging with tenants — a gross lease or standard net lease can offer higher yields in exchange for that effort. Multi-tenanted office buildings and suburban retail strips often fall into this category. The additional management burden is the reason these assets trade at higher yields, and for capable investors, that represents an opportunity.
The growth-oriented investor
If you are seeking upside beyond fixed rental increases, a percentage lease in a well-located retail precinct offers the potential for income growth that outpaces inflation. This strategy requires careful tenant selection and a genuine understanding of the retail market in your catchment area. It is higher risk and higher reward, and it demands more active monitoring of tenant performance.
The value-add investor
Investors who specialise in repositioning assets often target properties with short WALEs, below-market rents, or expiring leases. The strategy is to acquire at a discount, re-lease on better terms (ideally to a stronger tenant on a net or NNN basis), and sell the stabilised asset at a higher price. This approach requires significant expertise and capital reserves, but it can generate outsized returns when executed well.
Whichever strategy you pursue, understanding the lease structure is the starting point. The building is the asset, but the lease is the investment.