How to Negotiate a Childcare Centre Lease Renewal in Australia

A lease renewal is the single biggest financial decision most childcare operators make — and most approach it too late, with too little preparation. On the landlord side, getting the renewal wrong means either losing a reliable tenant or leaving money on the table. Both sides have more leverage than they think, but only if they understand what drives the other party’s decision.

This guide covers the practical steps, timing, and negotiation points that matter — whether you are the operator renewing or the landlord receiving the request.

Why Lease Renewals in Childcare Are Different

Childcare leases are not like a retail shop or office tenancy. The operator cannot simply relocate if the terms do not work. Moving a childcare business means losing families, reapplying for Service Approval through ACECQA, refitting a new premises to meet National Quality Framework (NQF) design requirements, and potentially months of lost revenue during transition.

That gives operators an inherent disadvantage — the switching cost is enormous. But it also means landlords have a strong incentive to retain a performing tenant, because a vacant childcare property is expensive. Purpose-built centres are difficult to re-lease or repurpose, marketing periods are long, and a new operator may require incentives like rent-free periods or fit-out contributions.

When to Start: The 12-Month Rule

The most common mistake operators make is leaving the renewal until the last few months of the lease. By that point, the landlord knows you have no alternatives and your negotiating position collapses.

For operators: Begin the renewal process at least 12 months before your lease expires or your option exercise date. This gives you time to:

• Obtain an independent rental assessment so you know what market rent actually is
• Review your centre’s financial performance and prepare your case
• Explore alternative premises (even if you do not intend to move — having options is leverage)
• Engage a leasing advisor or solicitor to review the terms

For landlords: Start your preparation early too. Understand your tenant’s financial position, assess the property’s market rent, and decide what terms you are willing to offer before the conversation begins.

Watch Your Option Dates

If your lease includes option terms (and most childcare leases do — typically structured as 10+10 or 15+10+10), you must exercise the option within the notice period specified in the lease. In NSW, the Retail Leases Act 1994 requires tenants to give between three and six months’ notice to exercise an option, depending on the lease terms.

Miss the deadline and the option lapses. You lose your right to renew on the existing terms, and you are negotiating from a much weaker position — effectively as a holdover tenant.

The Operator’s Playbook: Five Negotiation Priorities

1. Rent — Know What You Should Be Paying

Rent is the headline number, but what matters is whether it is fair relative to the market and sustainable relative to your revenue. According to the Australian Childcare Alliance, childcare lease costs typically range from $2,500 to $4,000 per licensed place per annum. Inner metropolitan centres can exceed $5,000 per place, while outer suburban and regional centres sit lower.

The benchmark that matters most is your occupancy cost ratio — total rent and outgoings as a percentage of gross revenue. For a childcare centre, this should ideally sit between 12% and 22%. If your occupancy cost ratio is above 22%, the business is under pressure regardless of how high your enrolments are.

When negotiating rent at renewal, come prepared with:

• An independent market rent assessment (not just the landlord’s valuer’s opinion)
• Your centre’s current occupancy rate and revenue
• Comparable rental evidence from similar centres in your area
• Data on local supply — if new centres have opened nearby, that affects demand for your landlord’s property

2. Rent Review Mechanism

The rent review clause determines how much your rent increases over the term. This is often more important than the starting rent itself, because a high escalation rate compounds quickly over a 10 or 15-year lease.

The three common mechanisms are:

Fixed increases (3–4% per annum): Predictable, easy to budget. But 4% compounding adds up fast — a $300,000 rent becomes $444,000 after 10 years at 4%. Many operators signed leases with 4% fixed increases during the boom years and are now paying well above market rent.

CPI-linked increases: Tracks the Consumer Price Index. Generally fairer for tenants, as rent rises in line with general inflation. Landlords sometimes resist CPI reviews because they can deliver lower increases than fixed percentages.

Market rent reviews (every 3–5 years): Rent is reset to market value at the review date. This can work for or against you depending on market conditions. In oversupplied areas, a market review might actually reduce your rent.

3. Lease Term and Options

Longer terms generally favour operators — they provide stability, protect your investment in fit-out and licensing, and underpin the value of the business if you decide to sell. A childcare business with only two years remaining on a lease is worth significantly less than the same business with 15 years of tenure.

At renewal, negotiate for the longest total term you can get. A structure of 10+10 (initial plus one option) or 10+5+5 is common. If you are exercising an existing option, explore whether the landlord will grant additional option periods beyond what the original lease contemplated.

For landlords, longer leases with a strong operator are desirable — they increase the property’s investment value. According to market data, childcare properties with long WALEs (Weighted Average Lease Expiry) consistently attract stronger yields and higher capital values at sale.

4. Make-Good Obligations

The make-good clause requires the tenant to restore the premises to its original condition at the end of the lease. For childcare centres, this is a significant cost — stripping out playground equipment, removing internal partitions, reinstating floor coverings, and sometimes demolishing purpose-built additions.

At renewal, negotiate to limit or defer your make-good obligation. Common approaches include:

• “Fair wear and tear excepted” — the standard softening of make-good requirements
• Remove only items installed without landlord consent — if the landlord approved your fit-out, argue it should remain
• Cash settlement in lieu of physical restoration — agree a fixed dollar amount rather than an open-ended obligation
• Waiver for the renewal period — defer the make-good until the absolute end of the lease (including all option terms)

For landlords, be reasonable about make-good. A purpose-built childcare fit-out has value to the next tenant. Insisting on a full strip-back often destroys value rather than preserving it.

5. Outgoings and Maintenance

Childcare leases often operate on a triple net basis, meaning the tenant pays rent plus all outgoings (council rates, water, insurance, land tax, and maintenance). At renewal, review what is included in outgoings and whether the allocation is fair.

Key points to negotiate:

• Capital expenditure cap — who pays for structural repairs and major maintenance (roof, HVAC, plumbing)?
• Outgoings audit rights — can you review the landlord’s outgoings reconciliation?
• Insurance requirements — are the required insurance levels reasonable and current?

The Landlord’s Playbook: Three Strategic Considerations

1. Retention Is Almost Always Better Than Replacement

The childcare leasing market has shifted. With over 7,300 long daycare centres now operating in Australia and more than 326 new centres opening in the past year alone (per the Australian Childcare Alliance), the supply side is competitive. If your current operator leaves, finding a replacement takes time — and you may need to offer incentives that erode your returns.

Approach the renewal as a partnership discussion, not an adversarial negotiation. A performing tenant on fair terms is the most valuable asset a childcare property can have.

2. Price for the Market, Not for Your Mortgage

Landlords sometimes set renewal rent based on what they need to service their debt, not what the market supports. If the operator cannot sustain the rent, occupancy drops, the business weakens, and eventually you face a vacancy or a distressed tenant. Neither outcome is good for property value.

Use an independent rental assessment based on comparable evidence — rent per place, occupancy cost ratios, and recent leasing transactions — to set a defensible and sustainable rent.

3. Think About Property Value, Not Just Rental Income

A long lease with a strong tenant on fair terms increases the capital value of your property far more than squeezing an extra $10,000 per year in rent. Childcare investors assess properties primarily on WALE and tenant covenant strength. A 15-year lease with a quality operator commands a materially higher price at sale than a five-year lease at a higher rent.

If you are considering selling the property in the next few years, a freshly signed long-term lease renewal is one of the best value-creation strategies available.

The Oversupply Factor: What It Means for 2025–2026 Renewals

The childcare sector is experiencing localised oversupply in many growth corridors, particularly across outer suburban Melbourne and Sydney. According to the Australian Childcare Alliance, new centre openings have outpaced demand growth in several regions, putting pressure on occupancy rates and operator profitability.

For operators renewing in oversupplied areas, this is leverage. If your centre’s occupancy has dropped because of new competition, the landlord’s property is also worth less — and a vacant property in an oversupplied market is extremely difficult to re-tenant.

For landlords, be realistic about the market. A rent concession today is better than six months of vacancy followed by a lower rent to a new operator.

Counterbalancing this, the federal government’s Three Day Guarantee legislation (commencing January 2026) guarantees every child a minimum of three subsidised days per week. This should lift demand for childcare places over time and support operator revenues — a positive signal for both sides of the lease negotiation.

Key Takeaway

A childcare lease renewal is a negotiation, not a formality. Both operators and landlords should prepare early, arm themselves with market data, and focus on structuring a deal that works for the full term — not just year one. The operators who approach renewal as a strategic exercise (not an administrative task) consistently secure better terms. And the landlords who treat their tenants as partners (not just income sources) protect their property values for the long run.

Thinking about your next lease renewal? Whether you are an operator preparing to negotiate or a landlord assessing your options, ChildcareLink can provide independent advice on market rent, lease structuring, and tenant strategy. Get in touch with our specialist team at childcarelink.com.au.

Sources

• Australian Childcare Alliance — industry data and oversupply reporting
• Cushman & Wakefield (2025) — childcare leasing market data
• ACECQA — regulatory framework
• NSW Retail Leases Act 1994
• Australian Government Department of Education — Three Day Guarantee legislation (2025)

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. ChildcareLink recommends seeking independent professional advice tailored to your specific circumstances before making any business or investment decisions.