Understanding variable outgoings in commercial property leases can be complex for both owners and tenants. However, armed with these insights, both parties can make smarter decisions and hopefully avoid any misunderstandings or disputes.
Learning about commercial real estate variable outgoings leads to more effective budgeting and financial planning, giving you greater certainty about your potential obligations under your lease.
Are you ready to tackle the tough stuff and level-up your commercial property knowledge? Let’s start with the basics.
What are variable outgoings?
Variable outgoings are essentially the operating expenses associated with a commercial property. These can vary significantly and include costs such as strata rates, shire rates, water rates, land tax, building insurance, property maintenance and property management fees. Other equally important outgoings might cover common area maintenance like cleaning, gardening, and security services.
Who Pays for What?
The question of who pays for variable outgoings is pivotal. Hopefully this has been clearly defined in your lease agreement. In most instances, the tenant shoulders the outgoings. However, this largely depends on the lease negotiations and agreement between the landlord and tenant.
While commercial and industrial leases often allow landlords to pass on most, if not all, variable outgoings to tenants, retail leases see more restrictions under the Retail Shops Act, particularly regarding property management fees and solicitors fees.
Calculation and Charging of Outgoings
Outgoings are typically charged in two main ways:
On Demand: This method involves the landlord or commercial property manager billing the tenant for outgoings as they are incurred, with payment terms set out in the lease agreement.
Monthly (Budgeted): Here, an annual budget for variable outgoings is prepared, usually by the commercial property management company before the financial year starts, based on the previous year’s expenses and adjusted for inflation or a fixed percentage. This total budgeted amount is then divided by 12, and tenants are charged a twelfth each month. At the financial year’s end, expenses are reconciled, with tenants either being invoiced for shortfalls or refunded for overpayments.
Special Considerations
Land Tax: A notable area of complexity, land tax should be calculated based on single ownership, not the aggregate value of multiple properties owned by a landlord. This ensures fair allocation of outgoings to tenants.
Air-Conditioning Maintenance and Other Insurances: While sometimes covered by the landlord within outgoings, responsibilities like air-conditioning maintenance usually fall to the tenant. Similarly, graffiti removal and plate glass insurance could be covered by strata levies, highlighting the importance of understanding what your strata levies include.
Remember…
Variable outgoings are a vital aspect of commercial real estate leases that require careful consideration and understanding. Whether you’re a property owner or a tenant, knowing how these costs are allocated and charged can help you manage your commercial property dealings more effectively.Need help with commercial property outgoings? Contact our experienced team today to discuss the possibilities.
Well, that wraps up our brief article today on outgoings, be sure to get in contact if you have any queries on outgoings.
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