One of the most common queries we get at Perth Commercial Property is ‘what outgoings should my tenant be paying?’
It would not be an overstatement to say outgoings are probably the most overlooked and least understood area of commercial / Industrial and retail property leasing, by both landlord and tenant.
Before diving into the nitty-gritty, let’s first define what outgoings actually are.
Long and confusing legal definitions aside, outgoings (sometimes referred to as operating costs) generally means;
All costs the Landlord incurs as a result of property ownership.
Included among these costs are insurance, rates, property management expenses, property maintenance, pest control and gardening, plus many more.
We have included a comprehensive outgoings checklist at the bottom of this article that you can download for a reference.
Commercial property outgoings can include
- Shire rates
- Water rates
- Land tax
- Strata levies
- Air conditioning service
- Pest control
- Property management fees
- Property condition reports & inspections
- Gardening & common area cleaning
- Rubbish removal and collection
Prior to entering into a lease agreement, both parties should be crystal clear on the outgoings each party is responsible for. Typically an outgoings budget or schedule of outgoing will be included in or appended to, the offer to lease.
The leasing or managing agent should provide interested tenants with an outgoings estimate. This will allow the tenant to calculate the approx total annual cost for renting the property prior to committing to anything.
In Western Australia commercial properties are typically advertised for lease excluding outgoings.
So if a property were being advertised for $100,000 per annum, you could typically expect outgoings to be charged in addition to the advertised rental figure, plus GST.
Annual rent: $100,000
Annual outgoings (est): $15,000
Gross Lease: $126,500
How do outgoings affect you?
Now we have a good understanding of what outgoings are, let’s look at the outgoings costs that might come out of your pocket.
A correctly prepared Lease document will set out the property outgoings and clearly define whose role it is to pay them.
The Schedule within the Lease sets out the percentage of those outgoings the tenant will be required to pay. For a standalone commercial property, this will usually be 100% of the outgoings expenses.
If the property is part of a building which accommodates other tenancies, such as a strata complex, or a small shopping centre, the outgoings are calculated on a percentage basis – the percentage the premises in question represents of the entire building or strata.
A commercial office building is 200m2 in total. Unit 4, an office within that building is only 50m2.
For the purpose of this example, let’s say the insurance for the entire building is $1,000 per annum.
It’s reasonable to expect Unit 4 is only required to contribute to insurance for the space they occupy, not the entire building.
So, Unit 4’s contribution to insurance would be calculated as follows;
50sqm / 200 sqm x $1000 = $250.
Or put another way, Unit 4’s outgoings percentage is 25% of the total building outgoings.
A tenant will generally be provided with an estimate of the total annual outgoings figure from the landlord or the management firm. This figure is often calculated using the actual costs from the prior year.
2 Leases to be aware of
Generally speaking, there are two types of commercial leases with respect to outgoings.
A Gross Lease
With a gross lease, the tenant makes only the agreed rental payment each month, and the landlord pays all outgoings expenses. So the rent and the outgoings are bundled up into a single figure.
(You will often find that the overall rental figure has been inflated to cover much of/if not all of the outgoings)
How Gross lease payments would look
Annual Rent $100,000
Total monthly commitment $12,000
A Net Lease
It works a little differently with a net lease – the tenant still makes the agreed monthly rental payment, plus they pay a separate sum which is allocated towards outgoings.
The landlord still pays the outgoings but is ultimately reimbursed by the tenant.
How net lease payments would look;
Annual Rent $100,000
Annual Outgoings $15,000
Monthly Rent $12,000
Monthly Outgoings $1,250
Total monthly commitment $13,250
GST would be applicable to both examples above.
On-demand vs allocated monthly
Where charged, outgoings tend to be charged a couple of different ways, let’s look at how that works, there are 2 components.
This means, as the landlord receives various invoices for services, such as Council rates etc, they issue the lessee with an invoice for payment.
With this method, the tenant is charged 1/12th of the total estimated outgoings figure each month in addition to the monthly rental. At year-end the accounts are reconciled and one of these two things will happen:
- if the tenant has paid too much towards outgoings throughout the year, they will receive a refund from the landlord.
- or, if the tenant contributed too little towards outgoings over the course of the year, they will be invoiced for the shortfall.
A retail lease is handled differently to a commercial industrial lease, mainly due to the Commercial Tenancy (Retail Shops) Agreements Act 1985 which prescribes which outgoings can and cannot be reimbursed by the landlord.
Trickier Outgoings Examples
When recovering land tax from a tenant, it is common practice to calculate land tax on single ownership basis. This means, if the landlord owns multiple properties, their land tax bill is not simply divided by the number of properties they own. This could skew the land tax figure allocated to the property and impact the tenant in an unfavourable way.
To achieve a single ownership calculation, the assessable value of the specific commercial property with the tenancy in place must be determined.
The question that needs to be asked here is… has air conditioning maintenance already been calculated into the monthly outgoings budget?
If there is an allocation to air con maintenance in the budget, the tenant doesn’t need to assume responsibility personally for maintaining the air conditioners.
If the cost is not included in the budget, air conditioning maintenance becomes a tenant responsibility.
Plate Glass Insurance
If the property is a strata property, it is worthwhile checking if plate glass insurance is already included in strata levies.
Similar to plate glass insurance, graffiti is often taken care of by the strata company.
To summarise, commercial property outgoings can be a contentious issue. With a landlord motivated to recover as many expenses as possible and a tenant often not aware exactly how much they are required to contribute to operating expenses and property maintenance costs, outgoings are often a source of debate between landlord and tenant.
When calculated over the lifetime of a lease, failing to recover all the outgoings you’re entitled to as a landlord can place you at a significant financial disadvantage, particularly when you consider most commercial leases are 2-5 years in duration.
The compounding effects of any oversights can accumulate into a staggering amount of money. For this reason outgoings deserve some careful thought, with careful attention being given to your lease agreement and how that effects what can and cannot be recovered from a tenant.
If this was helpful or you would like us to cover retail leasing in another article, please let us know in the comments section below.