Buying Your Premises From Your Landlord: How the Purchase Runs
Your landlord will sell to you. Here is how the lease terms, the off market price and the finance timeline actually fit together.
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Owner Occupier · Business Premises · Off Market Purchase
Buying Your Premises From Your Landlord: How the Purchase Runs
Your landlord tells you he is selling, and offers you first look. What happens from that moment is governed by your lease, by a price nobody has advertised, and by whether your finance can move to the landlord's timetable.
Quick Answer
When your landlord decides to sell the building you occupy, the purchase runs off your lease rather than off a listing. What your lease says about a first refusal or an option sets the clock, the price is agreed privately, and an owner occupier commercial property loan funds it.
Also called: a sitting tenant purchase, or an off market purchase.
How does buying the premises you already lease actually start?
Buying the premises you already lease starts with a conversation with your landlord, not with an application. In almost every one of these files the first event is the landlord raising the subject informally, months before anything is drafted, and the tenant treating it as news rather than as a clock starting. It is a clock starting. From that moment there is a sequence, and each step has to be true before the next one can happen.
The decision about whether owning the building suits your business is a separate question, and it is answered elsewhere. This post picks up on the other side of it: the decision-side companion piece is here, and what follows assumes you have already made it.
The sequence is short but it is strict. First, establish what your lease actually entitles you to, because that determines whether you have exclusivity or merely a head start. Second, get an indicative finance position, so you know your realistic ceiling before a number is discussed. Third, agree a price, which on an unlisted building means agreeing a method as much as a figure. Fourth, contract and finance run in parallel against the landlord's timetable. Fifth, settlement, at which point your lease and your title meet.
General guidance on business premises obligations is available from business.gov.au, and it is worth reading before you start, because the property questions and the finance questions arrive together and get answered separately.
What is a right of first refusal, and how is it different from an option to purchase?
A right of first refusal obliges your landlord to offer the property to you before selling it to anyone else, while an option to purchase gives you the ability to compel a sale on terms already agreed. The difference matters more than the similar-sounding names suggest. A first refusal is reactive and is triggered by someone else's offer. An option is proactive and is exercised by you.
In practical terms, a right of first refusal usually means you get a defined window, often short, in which to match a price the landlord has already been offered or has set. That window is where most sitting tenant purchases fall over, because the finance work has not started. An option to purchase typically fixes a price or a pricing mechanism up front and gives you a longer, defined period, which is far easier to finance against.
Many commercial leases contain neither. That is not a problem in itself, but it changes your position from protected to preferred, and it means the only real exclusivity you have is the landlord's preference for a clean sale to a tenant he already knows.
| What the lease says | What it obliges the landlord to do | How long you get | What it means for your finance timeline |
|---|---|---|---|
| Right of first refusal | Offer the property to you before accepting another buyer, usually on the same terms. | A defined and typically short notice period written into the clause. | Tight. Indicative approval needs to exist before the clause is triggered, not after. |
| Option to purchase | Sell to you if you exercise, on the price or pricing method already agreed. | A defined option period, commonly measured in months. | Workable. Valuation, contract and approval can be sequenced properly. |
| No clause at all | Nothing. The landlord may sell to any buyer at any time. | Only what goodwill and the landlord's timetable allow. | Uncertain. Speed of response is the only leverage you have. |
Read the clause itself before relying on a summary of it. Terms drafted a decade ago are frequently narrower than the tenant remembers, and the trigger conditions are where the detail lives.
How is the price set when the building was never listed?
The price on an off market purchase is agreed between two parties with no bidding process, which means it is set by method rather than by market test. There are three methods that come up, and it is worth knowing which one your landlord is using before you respond to a number.
An independent valuation, jointly commissioned
Both parties appoint a valuer and agree to be bound by, or to negotiate around, the assessed figure. This is the cleanest method and it is the one most likely to align with what your lender will accept, because the lender is going to commission its own valuation regardless and will lend against the lower of the contract price and that valuation.
The landlord's own number
Often derived from what the building yields at the rent you are currently paying, or from what a neighbouring property recently sold for. This is where a gap most commonly appears, because a landlord who has held the asset a long time may be capitalising a rent that is above current market, which inflates the figure.
An agent appraisal, informally obtained
Cheaper and quicker, and directionally useful, but an appraisal is not a valuation and no lender treats it as one. It is a starting point for a conversation, not a basis for a contract.
Whichever method is used, the number that governs your funding is the one the lender's valuer produces. If the agreed price sits above it, the difference comes out of your own cash on settlement day. That is the single most common reason a sitting tenant purchase stalls, and it is entirely avoidable by getting an indicative position early. If you want a read on where your file sits before you talk numbers with your landlord, check your eligibility first.
How does your lease interact with the finance timeline?
Your lease sets the outer boundary of the transaction, and the finance timeline has to fit inside it. Settlement timeframes on an owner occupier commercial purchase are typically measured in weeks rather than days, and they vary by lender and by state, which is a longer runway than most tenants assume when they agree a settlement date verbally.
Three lease features collide with that runway. The remaining term is the first: a lease with a short tail gives the landlord an incentive to move quickly and gives you less room to negotiate. Any first refusal notice period is the second, because that period is usually written assuming a cash buyer. The third is the rent review date, which can matter more than it looks, since a review that lands mid negotiation changes the yield the landlord is pricing off.
The practical sequencing point is that valuation and contract review should start together, not one after the other. A commercial property loan file on a tenanted or partly tenanted building carries a valuation that takes longer than a residential one, and the lender will want to see the contract before it instructs. Getting the contract issued in draft while the finance conversation is running is what compresses the timeline.
What does the lender make of the rent you have been paying?
The rent you have been paying is read as evidence, and it is treated better than most borrowers expect. A lender assessing an owner occupier purchase adds the rent back as an expense that disappears on settlement, then tests whether the new loan repayment fits in the space it leaves. That add-back is often the difference between a file that services and one that does not.
Beyond the arithmetic, a clean rent payment record on the specific building is the closest thing to a repayment history on the asset itself. It answers a question the lender would otherwise have to infer, which is whether this business can carry the cost of this property through a normal trading cycle. Serviceability is still assessed on the business financials, but the rent record moves the qualitative read.
Where the rent has been well below market, the picture reverses. The step up from a legacy rent to a market rate loan repayment can be significant, and the lender will size the loan against the new commitment rather than the old one. Current pricing context across the lane is set out in our commercial property loan rates guide, which is the better reference than any single quoted figure.
How much deposit does an owner occupier need on their own premises?
An owner occupier purchase typically supports a higher loan to value ratio than an investment purchase of the same building, which is indicative and varies by lender. The reasoning is straightforward from the credit side: the occupant and the borrower are the same entity, the income servicing the debt is the trading business rather than a third party tenant, and vacancy risk on settlement is nil.
The number that matters is not the headline percentage but the cash it leaves you to find, and that is calculated against the loan to value ratio applied to the lower of price and valuation. On a building where the agreed price sits above the valuation, your contribution grows by the whole of the difference.
Where the contribution is short, the equity you already hold elsewhere is usually the answer before more cash is. A second mortgage against another property can cover a deposit gap on a defined timeline, and the mechanics of using existing property equity for a purchase deposit are set out in our note on funding a deposit from an existing property. It is a structure with a cost and an exit, and both need to be planned rather than discovered.
What happens to your lease at settlement?
Your lease ends at settlement, in most cases automatically, through what lawyers call a merger of interests: the tenant's interest and the landlord's interest come to rest in the same party and the lease is extinguished. Nobody has to terminate anything. It simply stops existing.
That is tidier than it sounds, but it has two practical consequences. The first is that any bond or bank guarantee lodged under the lease needs to be released, and it does not release itself. The second is that outgoings, rent and any make-good obligations are adjusted at settlement like any other property adjustment, so a make-good clause that would have cost you money at the end of the term generally falls away with the lease.
The other thing that changes at settlement is your overall debt position, and it changes on your personal file as well as the business one. In deals I have seen, an owner who has just added a commercial facility is surprised at how that reads the next time a home loan is assessed, particularly where income is self-employed and recently reinvested. Our note on a home loan after a commercial premises purchase covers that sequence, and a One Doc Home Loan is one of the paths that stays open when standard full documentation does not, which the glossary entry explains in plain terms.
Buying the building you already occupy is a transaction with a fixed order, and almost every problem in it comes from doing the steps out of sequence. Establish what the lease entitles you to, get an indicative finance position before a price is discussed, agree the price by a method your lender will recognise, then run the contract and the finance together against the landlord's timetable. The lease that gave you your position in the building disappears at settlement, and what replaces it is a facility that has to be structured for the way your business actually trades.
Key takeaway: get your finance position established the week your landlord raises the subject, not the week the contract arrives.Frequently Asked Questions
You can get a commercial loan to buy the premises you currently rent, and the fact that you already occupy the building is usually treated as a strength rather than a complication. The lender assesses it as an owner occupier commercial property loan, which means it looks at your business trading position rather than at a tenant's covenant. Your existing lease, your rent payment history and your remaining term all become evidence in the file.
The owner-occupation test is a lender policy that asks how much of the building your own business will actually use, and lenders typically require the business to occupy a majority of the lettable area, commonly expressed as at least half, with the exact threshold varying by lender. If you occupy the whole building the test is not an issue. If part of the building is tenanted to someone else, the file is assessed as part owner occupier and part investment, which changes the serviceability build and sometimes the loan to value ratio.
Settlement timeframes on an owner occupier commercial purchase are typically measured in weeks rather than days, and they vary by lender and by state. The valuation, the contract review and the search process each carry their own clock, and a commercial valuation on a tenanted or recently vacated building takes longer than a residential one. If your landlord has set a short settlement, the finance timeline is the constraint to negotiate against, and our guide to how commercial property loans work sets out what has to happen in what order.
The rent you pay does not count as income, but it does count in the assessment, because the lender adds it back as an expense you will stop paying once you own the building. That add-back is one of the reasons an owner occupier purchase can service where the raw profit figure looks tight. What the lender wants to see alongside it is a clean payment record on that rent, which feeds directly into the serviceability read on the file.
Your landlord can sell to someone else while you are arranging finance unless your lease says otherwise or you have signed a contract. A right of first refusal obliges the landlord to offer the property to you before accepting another buyer, and an option to purchase locks the property up for a defined period, but with neither clause in the lease you are simply one interested party negotiating off market. That is why the finance conversation starts the day the landlord raises the subject, and why the decision-side companion to this piece is worth reading before the price is discussed.
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