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Commercial lease outgoings are the costs of running a building - things like council rates, insurance, common area cleaning and lift maintenance - that a landlord passes on to tenants on top of, or as part of, the rent. At Tenant CS, we sit on the tenant's side of these deals, and outgoings are one of the most common places we see tenants pay more than they need to.
Rent gets all the attention in a lease negotiation, but outgoings can add a significant amount to what you actually pay for your space each year. They also tend to rise over time, so the way they're set up in your lease affects your costs for the whole term.
Outgoings are a landlord's reasonable expenses for operating, maintaining and repairing a commercial property, which the lease allows them to recover from tenants. In a multi-tenant office building, the landlord pays these costs and then charges each tenant a share, usually based on how much of the building they occupy.
For example, if you lease one floor of a 10-storey building with floors of equal size, you would typically pay around 10% of the building's recoverable outgoings.
Every lease is different, so the outgoings clause in your lease is what counts. Building costs that are commonly recovered through outgoings include:
Outgoings cover the building. Costs tied to your own tenancy and how you use it are usually billed to you separately, including:
Structural repairs, such as major defects or roof leaks, and capital items like replacing the base building air conditioning plant, are usually the landlord's cost rather than an outgoing. Whether that applies to you depends on how your lease is drafted, so check the wording.
Yes, gross rent generally includes outgoings, but how much of them depends on the lease structure. There are three common set-ups:
When you're comparing two buildings, always convert the rents to the same basis (net or gross) before you compare them. You can read more about the difference between net, gross, face and effective rent.
Most leases work out your share of outgoings by dividing your lettable area by the building's total lettable area. That percentage is then applied to the building's total recoverable outgoings.
Here's a worked example. The figures below are hypothetical assumptions, not market rates:
On a net lease of $650/sqm net, your total rent and outgoings would be $650/sqm + $120/sqm = $770/sqm, before separately charged tenancy costs like electricity and cleaning. That's $385,000 a year for 500 sqm, not the $325,000 the net rent alone suggests.
Some leases apportion certain costs differently, for example by floor, by usage or between office and retail parts of a building. Check that the method in your lease is clear and that it makes sense for your space.
Outgoings are usually paid monthly, based on the landlord's budget for the year. After the year ends, the landlord compares actual costs with the budget and issues a reconciliation. If actual recoverable costs were higher, you may need to pay the difference. If they were lower, the overpayment should generally be credited or refunded in accordance with the lease.
Tenant tip: Budget for the reconciliation. An unexpected adjustment invoice a few months after year end is a common surprise for tenants who only budgeted for the monthly payments.
On a semi-gross lease, your rent includes outgoings up to a set base year. From then on, you pay your share of any increase above the base year amount.
Problems arise when the base year doesn't line up with the start of your lease. If the base year sits several months before you move in, it won't be long before you're invoiced for your first outgoings increase.
Here's how it works. If you lease 10% of the building and the building's outgoings rise by $40,000 compared with the base year, you'll pay an extra $4,000 that year (10% × $40,000). Those increases build up year after year.
We generally recommend negotiating a base year that aligns with your lease commencement or is as late as commercially achievable. An earlier base year can mean paying increases sooner, so it's important to understand the financial impact before agreeing. A later base year defers increases, which helps with cash flow and budgeting. You can read more about how a base year works and the traps to avoid.
Retail leasing laws vary by state and set specific rules around which outgoings can be recovered and how they must be disclosed. These protections can apply to certain premises beyond traditional retail shops. Whether your lease is covered depends on the location, permitted use and relevant legislation. For leases outside these protections, the wording of the lease is particularly important. If you think retail leasing laws may apply, your state's small business commissioner is a good place to start, as they publish free retail leasing guides. We also suggest getting your own legal advice before you sign.
Like most of a commercial lease, the outgoings clause is negotiable. These are the points we focus on for our clients.
Before you sign, ask the landlord for the building's current outgoings budget, broken down by item. It shows you what you'll actually pay and makes it easier to spot anything that looks high or out of place.
Make sure the lease excludes costs that should sit with the landlord, such as structural repairs, capital replacements, leasing commissions, costs associated with managing the landlord's investment rather than operating the building, and costs attributable to other tenants.
On a net or semi-gross lease, try to negotiate a cap on how much your share of outgoings can increase each year. Landlords won't always agree, but it's worth asking, especially for larger tenancies.
On a semi-gross lease, negotiate a base year that aligns with your lease commencement or is as late as commercially achievable, and model what an earlier base year would cost you before agreeing.
Ask for the right to receive an audited annual statement of actual outgoings and to query the figures. If something doesn't add up, you want a clear process to resolve it.
Tenant tip: Compare the outgoings budget with similar buildings nearby. If one building's outgoings are well above the others, ask why - it can be a useful point of leverage in your negotiation.
Outgoings are just one of more than 40 points you can negotiate in a commercial lease. Our commercial leasing checklist covers the rest of what to check before you sign, and if you're unsure of any terms, our guide to commercial real estate terminology explains them in plain English. To see how outgoings fit into your total cost of occupancy, read how much rent you should pay for your office space.
We only ever act for tenants. When we negotiate a lease, we review the outgoings budget against comparable buildings, push for the right exclusions, caps and base year, and make sure you know your true cost of occupancy before you commit. That way, the deal you agree on is the deal you actually pay for.
Book a call with us today to see how we can help you.
Outgoings are the costs of operating, maintaining and repairing a commercial building that a landlord recovers from tenants under the lease. They commonly include council and water rates, building insurance, common area cleaning and electricity, lift servicing, fire safety and building management. Each tenant usually pays a share based on the area they lease, and the lease sets out exactly which costs can be recovered.
Yes, gross rent generally includes outgoings, so you pay one combined figure. The landlord generally absorbs increases in outgoings, subject to any adjustment provisions in the lease. Under a net lease, you pay net rent plus your share of outgoings on top. Under a semi-gross lease, outgoings are included up to a base year, and you pay your share of any increases above that year.
Outgoings are usually calculated by dividing your lettable area by the building's total lettable area, then applying that percentage to the building's total recoverable outgoings. For example, a 500 sqm tenancy in a 10,000 sqm building pays 5%. You typically pay monthly based on the landlord's budget, with an annual reconciliation against actual costs once the year ends.
