Why the lease matters to value
A business valuation usually rests on maintainable earnings: what the business can be expected to earn into the future. For a café, clinic, workshop or shop, many of those earnings depend on trading from a particular site. The lease is the document that says how long the business can stay there, what it will pay, and what happens if the landlord wants the premises back.
A buyer reads the lease as a risk document. The question is not only "what is the rent?" but "how secure are these earnings, and for how long?" A business with five years remaining plus options, at a market rent, with standard assignment terms, is a different proposition from the same business with eight months left and no option.
The lease decides how secure the earnings are, and for how long
What does the lease give a buyer?
Long remaining term, plus options
Supports the assumed earnings period
Short remaining term, no option
Higher risk; may reduce value, especially for site-dependent businesses
Rent above market
Lower maintainable earnings
Relocation or demolition clause
Shortens the reliable earnings period if active
What a valuer looks at
Remaining term and options
The remaining term is the period the tenant is entitled to occupy without further agreement. Options to renew are rights to extend that term, usually on conditions such as giving notice within a window and not being in breach. They add security, but they are not identical to a secured term: notice dates can be missed, and rent on renewal is often reset.
In Victoria, the Retail Leases Act 2003 requires the term of a retail premises lease, counting option periods, to be at least five years, subject to the exceptions in the Act (s 21). That protects the overall term at the start of a lease. It does not protect a buyer who arrives late in the term.
Rent and rent reviews
Rent is an operating cost, so rent above market reduces maintainable earnings and rent below market inflates them, at least until the next review. A valuer will compare the current rent with market evidence and read the review clause to see what the rent will become.
In Victoria, a retail lease must state when rent reviews occur and the basis for them, such as a fixed percentage, an index, a fixed amount or current market rent (s 35). Where the review is to current market rent, the Act defines it by reference to a willing landlord and willing tenant at arm's length, and excludes goodwill created by the tenant and the tenant's fixtures and fittings (s 37). Where the business pays rent to an owner's related entity, see market rent adjustments for owner-owned premises.
Assignment consent
A sale of business assets usually involves assigning the lease to the buyer, which normally needs the landlord's consent. business.gov.au lists this among its due diligence questions: will the landlord agree to transfer the lease, or will a new lease have to be negotiated?
For Victorian retail leases, the Act limits the grounds on which a landlord can withhold consent, including proposed use, the assignee's financial resources or business experience, and, where the premises will continue to be used for an ongoing business, whether the tenant has given the assignee business records for the previous three years (or the shorter period the tenant has traded there) (s 60). If the tenant follows the required procedure and the landlord does not respond within 28 days, consent is taken to be given (s 61). Where the outgoing tenant gives the landlord and assignee a disclosure statement that is not false, misleading or materially incomplete, the tenant and its guarantors are not liable for the assignee's later obligations under the lease (s 62). Leases outside the retail legislation depend much more on their own wording.
Make-good
Make-good clauses require the tenant to return the premises in a specified condition at the end of the lease. For a fitted-out restaurant, clinic or workshop, this can be a material future cost. A buyer taking an assignment will consider who bears it and when.
Relocation and demolition clauses
Some leases allow the landlord to relocate the tenant or end the lease for redevelopment. In Victoria, a landlord relying on a demolition clause in a retail lease must show a genuine proposal and give at least six months' written notice, and compensation can be payable in some circumstances (s 56). Relocation requires at least three months' notice and details of reasonably comparable premises (s 55). Even with those protections, a live redevelopment plan affects how long a buyer can expect to trade from the site.
Decision table
This table is a practical summary of how each feature tends to be treated. It is not legal advice; the lease itself, and the legislation where the premises are located, govern.
| Lease feature | What the valuer asks | Possible effect on value |
|---|---|---|
| Long remaining term, plus options | Are option conditions and notice dates clear and achievable? | Supports the assumed earnings period |
| Short remaining term, no option | Is a renewal likely, and on what rent? Would customers follow to new premises? | Higher risk; may reduce value, especially for site-dependent businesses |
| Rent above market | What would a market rent be, and when can it be reviewed? | Lower maintainable earnings |
| Rent below market | When does the next review occur, and on what basis? | Earnings benefit may be temporary; normalised to the extent it will not continue for the assumed period |
| Fixed percentage or index reviews | What will rent be over the assumed period? | Affects forecast costs; the rent path is set by the formula, not the market |
| Landlord consent to assignment required | Is the landlord likely to consent, and are there unusual conditions? | Transaction risk; may delay or prevent a sale |
| Significant make-good obligation | What would it cost, and when does it fall due? | A future cost a buyer may deduct |
| Relocation or demolition clause | Is there any current redevelopment proposal? | Shortens the reliable earnings period if active |
A hypothetical example
Two identical cafés each earn $200,000 a year before rent. Café A pays $60,000 rent, which a property valuer assesses as market, and has six years remaining plus a five-year option. Café B pays $80,000 rent on a lease with nine months remaining and no option, and the landlord has not indicated whether it will grant a new lease.
At a market rent, Café B's ongoing earnings would also be $140,000, but a valuer would also account for the above-market rent the buyer must still pay until expiry (about $15,000: $20,000 a year for nine months). More importantly, a buyer of Café B faces the real possibility of having no premises within a year. Even with similar earnings at a market rent, the two businesses would not be expected to attract the same price.
Café A keeps $140,000 after rent, Café B $120,000, from the same $200,000
Café A
Market rent; six years remaining plus a five-year option
- Earnings before rent$200,000
- Rent−$60,000
Earnings after rent$140,000
Café B
Nine months remaining, no option, no word on a new lease
- Earnings before rent$200,000
- Rent−$80,000
Reported earnings after rent$120,000
At a market rent, Café B's ongoing earnings would also be $140,000, but its lease ends in nine months
- Café B reported earnings after rent$120,000
- Rent of $80,000 normalised to a market rent of $60,000+$20,000
- Above-market rent still payable until expiry (about $15,000)A cost the buyer still bears, not part of ongoing earningsAccounted for separately
- Ongoing earnings at a market rent$140,000
Scale starts above zero so the changes are visible. Totals are cut short.
Limitations
The examples of statutory rules on this page are from the Victorian Retail Leases Act 2003 and apply only to leases within that Act. Other states and territories have their own legislation, and many commercial and industrial leases fall outside retail leases legislation altogether. Lease interpretation is a legal question. A valuer will read the lease for its commercial effect, but your lawyer should advise on rights and obligations.
Next steps
- Gather the signed lease, all variations, any option notices and the most recent rent review.
- Diarise option exercise windows; a missed notice can change value overnight.
- If you are selling, consider raising assignment with the landlord early, with your lawyer's advice.
- Where rent is paid to a related party, obtain market rent evidence before the valuation. See market rent adjustments for owner-owned premises.
- For a sale, a buyout or a restructure, Oliver Group is the Valuo practice for transaction and shareholder valuations.
Questions
Does a business with a short lease have no goodwill?
Not necessarily. It depends on whether the earnings rely on that location and how likely a new lease or renewal is on workable terms. A business whose customers would follow it to new premises is less exposed than one that depends on foot traffic at a particular site.
Should the valuation assume the options will be exercised?
The valuation should say what it assumes. Options are generally the tenant's right to extend, so they add security, but rent on renewal and any conditions on exercise still need to be considered.
Who pays for make-good when a business is sold?
It depends on the lease, the assignment documents and the sale contract, which should say who carries the obligation. A buyer taking over the lease will want to know what make-good could cost at the end of the term.
Sources
- Retail Leases Act 2003 (Vic), authorised version 027, Victorian Legislation. Sections 21, 35, 37, 55, 56, 60, 61 and 62: minimum term, current market rent, relocation, demolition and assignment rules for Victorian retail premises leases.
- Buy an existing business, business.gov.au. Due diligence should ask whether the landlord will agree to transfer the lease or whether a new lease must be negotiated.
Cite or reuse this page
Valuo Insights team (2026). How the premises lease affects what a business is worth. Valuo. https://valuo.com.au/insights/how-the-premises-lease-affects-business-value/ (updated 14 November 2026).
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General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.