What is a master lease?

In property, a master lease sets up a three-way flow: owner to master lessee to subtenants. The owner, as lessor, holds title and remains the landlord under the head lease. The master lessee takes possession, pays rent to the owner, and manages or sublets the space to end-tenants under subleases or licences. Sub-rent above the head rent and operating expenses is the master lessee's margin.

When the master lessee sublets, the owner stays the landlord under the head lease and the subtenants' rights run against the master lessee. An assignment is different: it transfers the master lessee's whole leasehold interest to a third party and normally needs landlord consent. A master lease also differs from property management, which leaves possession and income with the owner.

Equipment finance uses the label differently: one master agreement sets the standard terms, and each asset is drawn down on its own equipment schedule with its own term, rentals and residual. Adding a machine later means another schedule, not a new agreement.

Under a fixed-rent master lease the master lessee pays a set periodic rent and keeps all subtenant income, which suits owners who want certainty. Under a revenue-share or percentage rent model the owner receives a base rent plus a share of turnover, common for retail, hospitality and leisure assets. A triple-net master lease has the master lessee pay rent plus most operating expenses such as rates, insurance and maintenance, typical of single-tenant commercial buildings.

Rent-to-rent or residential management arrangements see the master lessee operate a block of flats or short-stay units, where compliance with residential tenancy law is essential. Some master leases also include a pre-agreed option for the master lessee to buy the property at a future date. In equipment and vehicle finance the term describes the master agreement and schedule structure set out above rather than any of these property models.

For owners, the appeal is predictable rent, less day-to-day tenant management and a single point of contact for collections. For master lessees, it is the margin between sub-rents and head rent, the ability to control several properties without buying them, and the freedom to run serviced apartments, short-stay units, pop-ups or a managed portfolio.

The main risks sit on the cashflow side. The master lessee still owes the head rent if space sits empty, and the owner is exposed to a single counterparty, which is why bank guarantees, security deposits or personal guarantees are common. Other traps include head leases or mortgages that forbid subletting, mishandled residential bonds, one-sided standard terms that could be challenged under unfair contract terms rules, and vague insurance or indemnity clauses.

Head rent received by the owner is assessable income, and sub-rent received by the master lessee is income too, with expenses each party incurs under the lease generally deductible to that party. Commercial lease supplies may be subject to GST depending on the parties' registration status. Bonds held for tenants are not income and must be kept separate. Fit-outs and plant installed by the master lessee may be depreciable, depending on who owns them under the contract. Whether the arrangement is accounted for as an operating lease or something closer to a finance arrangement is a question for your accountant.