Commercial Outgoings: What Are They & What's A Base Date?

March 16, 2021
|
Commercial Real Estate

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Sophia Bockisch
Sophia Bockisch
Manager

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When it comes to leasing commercial or retail premises, rent is only one part of your ongoing financial cost. Additional expenses (known as outgoings) that are associated with the operation, maintenance and repair of the property may also be payable.

Outgoings for commercial property operate on the assumption that the landlord provides services to the tenant. The tenant then reimburses the cost of this service back to the landlord on a prorated basis. Nonetheless, it's essential to negotiate:

  1. The outgoings that will be your responsibility
  2. The base date that will be used for calculating your outgoings

Let’s delve a little deeper into these two key points…

What are the types of outgoings?

You might be wondering things like "who pays council rates on commercial property?."

Where residential landlords always pay for outgoings, a commercial tenant is commonly required to pay both rent and the outgoings for commercial property, which could include:

  • Electricity
  • Water rates
  • Common area cleaning and maintenance
  • Council rates
  • Security services
  • Cleaning services
  • Rubbish collection services
  • Repairs and maintenance that aren’t fair wear and tear (such as servicing the air conditioning facilities).

How are commercial lease outgoings documented in a lease?

Image of a lease being signed | Base date calculating outgoings article

When it comes to documenting outgoings, your commercial lease agreement should:

  • Clearly itemise the outgoings that are your (the tenant’s) responsibility to pay and which are the owners. In some cases, certain outgoings may be split between you and your landlord.
  • Outline how the outgoings will be calculated and distributed (this is particularly important if multiple tenants are sharing a commercial space).
  • Specify how particular outgoings are to be paid. For example, is the owner reimbursed after an expense has been paid or do you pay the expense directly? Alternatively, are periodic payments made based on estimates of future expenses that are reconciled later?

Tip: Before you sign a new lease, ensure that you ask your landlord for an itemised copy of the budgeted outgoings. This will help you to understand where your money is going and if you are being overcharged for specific items.

Why the base date for calculating your commercial lease outgoings is important

Landlords typically have a base date/year in the lease used to calculate increases in their outgoing recoveries from tenants. And, generally, all future and past costs are indexed or compared to this year or date.

Problems arise for tenants when the base date does not coincide with the commencement of the lease agreement. Suppose the base date documented in the leasing agreement is several months before the lease commencement. In that case, it's only a short period of time before the tenant is invoiced for their first outgoings recovery increase.

Let’s do the math

If you’re leasing 10% of the available office space in a building, you’ll be expected to pay 10% of any increase in the buildings’ general operating expenses after the base year.

Let’s say the buildings’ expenses grow by $40,000 in the second year of your lease; your operating expenses will increase by $4,000 (i.e. 10% of $40,000).

So, ideally, the base date should be as far into the future as you can possibly negotiate. It should never be in the past. At worst, it should be in the current financial year.

If the base date for calculating increases in your commercial lease outgoings is earlier than the commencement of your lease agreement, you’ll be liable for an increase much earlier than you would have otherwise.

The further into the future your base date is, the more you will defer the effect of any increases, which will help with your cash flow and budgeting.

Still a little confused? Read more about what a base year is and why it’s so important to understand.

image of man using a calculator representing someone calculating commercial lease outgoings

How we can help

The team at Tenant CS are specialists in commercial leasing, and we have a wealth of experience across different markets. We can help you to negotiate a new lease or a renewal to secure the best possible terms and conditions for your commercial lease. Get in touch today to see how we can help you.

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