Buyers and financiers typically look for three to five years of remaining lease term at settlement. Leases of three years or less discount practice value. Landlord consent is required to assign most commercial leases, with assignment costs commonly around 5% of annual rent. Related-party rent must reflect market rates. Pathology subleases must comply with the Health Insurance Act.
Lease terms and property tenure
Buyers and financiers typically look for at least three to five years of remaining lease term at settlement, with options beyond that. Leases of three years or less increase the risk that the business will need to relocate or renegotiate from a weak position soon after purchase. Quinn M&A, an Australian business valuation firm, notes that where the remaining lease term is 'quite short (that is, under 3 years), a risk may exist to the future operation of the business beyond the remaining term of the lease' and that 'risks such as these often discount business values'.
Piper Health lists security of tenure, lease terms, annual increases and options for extension as direct inputs to the calculation of future maintainable earnings. Lenders test lease security as part of the acquisition finance approval process. A short or expiring lease can reduce borrowing capacity or trigger additional conditions.
Assignability and landlord consent
Most commercial leases require the tenant to obtain the landlord's consent before assigning the lease. Under the Retail Leases Act in NSW (section 39) and equivalent legislation in other states, a landlord cannot unreasonably withhold consent. Still, he may refuse if the proposed assignee has inferior financial resources or business experience. A 2025 NSW Supreme Court decision confirmed that landlords cannot use consent processes to extract collateral advantages or impose conditions beyond the lease terms.
Expect landlords to pass on the cost of assigning the lease. During a recent sale in Victoria, this was currently around 5% of the annual lease amount. In the sale agreement, you will need to determine whose cost this is, or whether it is a shared expense.
Where assignment is not governed by retail lease legislation, landlords have broader discretion. Consent processes commonly involve financial checks on the incoming tenant, personal guarantees and potential rent variations. Meridian Lawyers identifies the lease, its assignability and obtaining landlord consent as central to the legal process of selling a medical practice. LegalVision notes that the assignment requires reviewing the existing lease, identifying the consent requirements and corresponding with the landlord or agent to obtain approval for the proposed assignee.
These mechanics can delay settlement. If consent is uncertain, buyers either require the seller to resolve the assignment before proceeding or reduce their offer to account for the risk.
It is essential that, as early as the due diligence stage, the seller make contact with their landlord.
Rent review mechanisms
Three rent review methods dominate Australian commercial leases: fixed percentage increases, CPI-linked adjustments and market rent reviews.
Fixed increases provide predictability for both parties. CPI-linked reviews track inflation but can be volatile. Market reviews reset rent to current conditions, typically every 3 to 5 years, and carry dispute risk.
Where current rent sits well below market, buyers adjust EBITDA down to reflect the expected cost increase at the next review. Where rent is above market, the excess is treated as a normalisation add-back. Quinn M&A confirms that where a business leases from a related party and rent is not in line with market norms, 'an adjustment will be required'.
Related-party leases
Practices that lease from an entity controlled by the owner face scrutiny on the rent level and terms. Above-market rent artificially suppresses practice profit. Below-market rent overstates sustainable earnings. Both require adjustment during valuation.
Independent commercial valuations provide the reference point. DPM notes that doctors commonly use a separate entity to hold the property and lease it to the practice and warns that this separation has significant consequences for CGT if the modified active asset test is not satisfied. In the absence of market evidence to justify rent, buyers adopt conservative assumptions.
Pathology and subleases
Pathology rent has been contentious. Two of Australia's largest pathology companies requested 50% rent reductions from GP practices that host collection centres, prompting the RACGP to flag the financial pressure on affected practices publicly. William Buck noted that the federal government has funded the Integrity Division to review and enforce compliance with pathology rent, with data analytics used to identify practices charging more than 20% above market value.
Under the Health Insurance Act, rent for pathology collection centres cannot be related to the number or value of pathology requests and must reflect fair market value. Sublease agreements need to be current, documented, transferable and compliant. Informal or expired arrangements carry the risk that buyers exclude that income from their valuation.
If the seller has gone to market and tendered for pathology tenants, these documents must form part of the buyer's due diligence, protecting both parties.
Owned property and sale-leaseback
Where the owner holds freehold, sale-leaseback structures separate business and property value. DPM notes that many medical practitioners use a separate entity to own the property and lease it to the practice and that the CGT treatment turns on whether the property qualifies as an 'active asset' under the modified active asset test. For buyers, the lease created by this arrangement must have a sufficient remaining term, clear assignment rights and rent at or near market rates.
Due diligence on premises
Buyer review of premises typically covers the remaining lease term and options, assignment rights and consent triggers, rent level relative to market (including related-party adjustments), rent review mechanisms and timing and sublease status and terms. Meridian Lawyers confirms that the vendor's solicitor will need a copy of the lease and that obtaining consent to assignment and securing lease variations are common conditions precedent in medical practice sale contracts.
Quinn M&A identifies short remaining lease terms, restrictive covenant clauses (including demolition clauses), and non-market-related-party rent as factors that 'can mean that business values will be discounted'.
Pre-sale preparation
Owners planning to sell within a few years should confirm the lease term, options and assignment rights, and extend or clarify where necessary. Where landlord consent is required, engage the landlord early. Benchmark rent to market using an independent valuation in related-party situations. Formalise any pathology or allied health subleases with compliant, transferable agreements.