What is a lease term?

The term is the spine of the agreement. It sets the timing of rent, reviews and outgoings, how long exclusive possession lasts, and when the lease ends or can be brought to an end early. It also drives whether the lease must be registered on title and whether certain statutory protections apply.

Two dates do the heavy lifting. The commencement date is when the lease legally begins, which is not always the day the tenant takes possession, and the expiry date is when the fixed term stops. Say plainly whether a fit-out or rent-free period counts inside the term. Vague wording such as 'commencing on or about 1 July' is where disputes start.

A fixed term has set start and end dates, and is used for residential tenancies, shop leases and offices taken for a defined period. Residential fixed terms commonly run six to twelve months, while commercial terms often run three to ten years, and longer for major premises.

A periodic tenancy rolls from week to week, fortnight to fortnight or month to month until notice is given, and often arises automatically when a tenant stays on after a fixed term ends. A renewable term is a fixed term carrying an option to extend on agreed terms. A ground or long-term lease runs for decades, is common for land development and major infrastructure, and is usually registered on title.

An option to renew has to be exercised exactly as the lease says: in writing, inside the window the lease sets, which is typically a band of months before expiry. Miss the window and the right is usually lost. For retail shop leases, state retail leasing legislation generally requires the landlord to notify the tenant of the last day to exercise the option, and the deadline can be extended where that notice is not given, so check the retail leases Act in your state. Some leases roll over automatically if neither party gives notice.

A break clause works the same way in reverse. It lets one or both parties end the lease early on set conditions: notice in the right form, rent up to date, no outstanding breaches, and sometimes a break fee. Strict compliance matters, because a defective notice usually fails, and a tenant who walks out in breach can be liable for rent until the premises are re-let.

Outside premises, the lease term is the rental period of a finance lease or operating lease over a vehicle, machine or fitout. Terms commonly run 24 to 60 months, matched to how long the asset stays useful and to the finance the lessor has raised against it.

The term also drives the residual value. A longer term repays more of the asset's cost through the rentals, so the residual at the end is smaller and the monthly payment higher, while a shorter term leaves a larger residual to settle, refinance or clear by handing the asset back. The ATO publishes minimum residual guidelines by term, and the end-of-term choices, return, purchase where the contract allows, extension or replacement, come from the schedule rather than from tenancy law.