When leasing a commercial property, outgoings generally refer to the building operating costs of the property you are leasing (ie the landlord’s expenses in owning the property) as well as certain other costs such as property management expenses.
Commercial property outgoings can include:
- Council and water rates
- Land tax
- Strata levies
It is wise to understand what is to be included in outgoings prior to signing your lease. This way you have a full understanding of the total cost of the commercial lease when undertaking your negotiations.
As a tip annual commercial rents are usually quoted ‘excluding’ or ‘before’ outgoings.
The formal lease document sets out the type of outgoings you will be liable for.
The schedule sets out the percentage of those outgoings you are to pay. This is usually 100% of the outgoings for the premises you are occupying unless you are leasing a commercial premises that is part of a building or strata. In this case if the percentage of outgoings is less than 100%, this percentage is the proportion the premises represents of the entire building or strata.
For example assume you are renting an office of 50 sqm in a commercial building that is 200sqm. Assume the insurance on the property was 1000 per annum. Generally speaking your share would be 50sqm / 200 sqm x $1000 = $250. Ie your outgoings percentage would be 25%.
You will generally be provided with an estimate of the total outgoings figure which has been calculated using the actual costs from the prior year.
Generally speaking there are two types of commercial leases with respect to outgoings
1. Gross Leases
In a gross lease, the tenant makes only the agreed rental payment each month, and the owner pays all outgoing expenses. (You will often find that the overall rental figure has been inflated to cover much of / if not all of the outgoings)
2. Net Leases
In a net lease, the tenant makes the agreed rental payment each month, plus an allocation of the outgoings. The owner still pays the outgoings, but is reimbursed by the tenant.
Where charged, outgoings tend to be charged via the following two methods:
1. On demand – this means that as the landlord receives and pays the bills ie the council rates, they can issue you with the bill to pay for their reimbursement.
2. Allocated monthly – this means you are charged 1/12 of the total estimated outgoings each month on top of the monthly rental. At the end of the year the bills are reconciled and if you have paid too much you will receive a refund or if you have paid too little you will be invoiced for the difference.
In less common cases you are not charged the actual outgoings relating to the commercial premises but increases in outgoings.
Increases in outgoings are increases above the amount the landlord is required to pay for certain things at an agreed date. For example, you may only be liable for increases in outgoings above those payable at 1 July 2007. In that case if the Council rates as at 1 July, 2000 are $1,000 and increase to $1,100 on 1 July, 2008 you will be liable for $100.
The combination of rent and outgoings to be paid is a matter for negotiation and should always be discussed and understood before a commercial lease agreement is entered into.