How to Direct a Good Leasing Outcome: A Guide for Boards
Somewhere in your organisation’s history, a board approved a lease that felt like a genuine win. A generous fit-out contribution. Free rent for the first three months. A landlord who seemed easy to deal with. Everyone in that room did their job. Nobody was negligent. And yet five years later, someone on that same board is staring at an occupancy cost line that has grown faster than revenue, an option period locked in on terms nobody remembers agreeing to, and a make good clause that could cost more than the entire fit-out was worth.
This is not a story about bad landlords or naive tenants. It is a story about time. Lease decisions are structurally different from most other decisions a board makes because the consequences do not show up in the same reporting period as the decision. A poor hiring choice surfaces in months. A poor lease structure surfaces in years, and by then the people who signed it have often moved on.
The incentive that becomes the trap
Fit-out contributions and rent-free periods are the most visible part of any lease negotiation, and they are also the easiest to misread. A landlord offering six months free rent and a $150,000 fit-out contribution on a ten-year term is not being generous. They are recovering that cost through the rent structure over the life of the lease, usually through a higher base rent or a steeper annual increase than the tenant would otherwise accept.
Boards evaluating a lease offer tend to anchor on the number that arrives first: the incentive. Few boards ask for a total occupancy cost model that runs the full term, incentive included, against a scenario without the incentive at a lower starting rent. That single exercise, done properly, changes which offer looks attractive more often than people expect.
Rent escalation is where the real damage compounds
A 4% annual increase sounds modest when it is presented as a single line in a ten-page agreement. Compounded over a ten-year term, it is not modest. It is a meaningfully different rent by year seven than the one the board approved in year one, and because it compounds on the previous year’s figure rather than the original base, the increases accelerate rather than stay flat.
Fixed percentage increases are administratively simple, which is exactly why landlords prefer them and why boards rarely push back. CPI-linked reviews feel safer because they are tied to inflation, but in a high-inflation environment they can outperform a fixed increase in the landlord’s favour just as easily. Market reviews introduce a different risk entirely: the possibility of a significant one-off jump if the market has moved since the last review, with limited ability to challenge the landlord’s valuation without engaging your own.
None of these structures is inherently wrong. What is wrong is a board approving one without modelling what it actually produces in real dollars across the full term, including any option periods likely to be exercised.
Make good clauses: the bill nobody budgets for
Make good obligations require the tenant to return the premises to its original condition, or to a state defined in the lease, at the end of the term. For a fitted-out office or a specialised space, this can mean removing partitions, restoring flooring, reinstating services, and repainting throughout. Organizations that received a substantial fit-out contribution at the start of a lease are sometimes required to remove the very fit-out the landlord helped fund, at the tenant’s cost, on exit.
This obligation rarely appears on anyone’s radar until the lease is ending and the finance team asks what the exit cost will be. A board that reviewed the make good clause on day one, and negotiated a capped make good figure or a diminishing obligation over time, faces a materially different conversation five or ten years later than a board that accepted the standard clause without comment.
The compounding effect of small deferrals
Most poor lease outcomes are not the result of one bad decision. They are the result of several reasonable-sounding deferrals stacking on top of each other. Deferring a proper market comparison because the current landlord relationship is good. Deferring legal review of the make good clause because the deal needs to close quickly. Deferring a total cost model because the incentive already looks attractive enough. Individually, each deferral is defensible. Together, over a ten-year term, they produce exactly the outcome boards are surprised by five years in.
What boards can actually do differently
The organisations that avoid this outcome are not the ones with the most sophisticated legal teams. They are the ones that ask a small number of specific questions before signing, and insist on answers in writing rather than assurances in conversation.
What is the total occupancy cost across the full term, including all increases and any likely option exercise, expressed as a single number rather than a starting rent?
What does the make good clause actually require, and has it been costed against current trade rates rather than assumed to be minor?
Who reviewed this lease independently of the party who sourced it, and did that person have any incentive tied to the deal closing?
A lease is one of the largest financial commitments most organisations make, and it is one of the few where the person negotiating on the tenant’s behalf is very often working for, or paid by, the other side. That single structural fact explains more poor five-year outcomes than any market condition ever will.
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