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.
Commercial lease outgoings operate on the assumption that the landlord provides services to the tenant. The tenant then usually reimburses the cost of this service back to the landlord on a prorated basis. Nonetheless, it's essential to negotiate:
Let’s delve a little deeper into these two key points…
Commercial outgoings are the expenses associated with operating and maintaining a commercial property.
Now, you might be wondering things like "what are outgoings in a commercial lease?" or "Who pays council rates on commercial property?."
Where residential landlords always pay for outgoings, commercial outgoings are typically borne by the landlord and are reimbursed by tenants as part of their leasing agreement. These costs may include:
What tenant’s often aren’t aware of is that outgoings costs exclude utilities and tenant-specific costs that are directly linked to a tenant's consumption or use of the space, such as:
The method of calculating outgoings can vary, but it often involves the landlord estimating the annual expenses and then allocating a proportionate share to each tenant based on factors like the tenant's leased space as a percentage of the total building area. Tenants are typically billed for their share of outgoings periodically, such as monthly or quarterly.
It's essential for tenants to carefully review the lease agreement to understand how outgoings are calculated and their specific responsibilities regarding these expenses.
How outgoings are passed on depends on your lease structure:
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.
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 building’s 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.
When it comes to documenting outgoings, your commercial lease agreement should:
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.
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.