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:

1. The outgoings that will be your responsibility
2. The base date that will be used for calculating your outgoings (if you’re on a semi-gross lease)

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

What are outgoings in a commercial lease?

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: 

• Water
• Common area electricity
• Common area cleaning and maintenance
• Council rates
• Security services
• Lifts and elevators
• Fire protection
• Repairs and maintenance that aren’t fair wear and tear (such as servicing the air conditioning facilities)
• Taxes and levies (in some cases)
  

What don’t commercial lease outgoings 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:

• Electricity - Electricity consumed by the tenancy is metred and billed directly by the supply authority
• Cleaning - Tenants in Sydney CBD can expect to pay $12-$25 psqm per year
• Water - Traditionally, the cost of water has been recovered by the landlord through outgoings. However, it’s becoming more common in Premium, A-grade buildings and refurbished buildings for water to be metred and billed directly based on usage
• Internet - tenants will be charged directly by their internet provider
• Air conditioning units - Legally, the landlord has an obligation to install and maintain base building services. However, tenants have a duty to maintain tenant services and comply with any maintenance obligations
• Fire protection equipment - Tenants are responsibile for ensuring the proper servicing of fire equipment, fulfilling maintenance obligations, and adhering to the fire safety regulations applicable to their business.
• Car parking - tenants usually pay for their own car parking. A state government levy may also apply.
• Fit-out repair and maintenance - Structural issues like wall cracks, major defects, or roof leaks are typically the landlord's responsibility. On the other hand, tenants are usually responsible for the fit out they installed, including walls, floors, fixtures, and inclusions.

How to calculate outgoings

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 are commercial lease outgoings passed on to the tenant? 

How outgoings are passed on depends on your lease structure:

1. Net lease - A lease where outgoings are payable on top of the rent
2. Gross lease - A lease where the outgoings are included in the rent
3. Semi-gross lease - A hybrid between a net lease and a gross lease. Here, the tenant is required to pay their portion of any increase in the cost of outgoings, based on the first year (also known as the ‘Base Year’) of the lease. 

You can learn more about the difference between net, gross and effective rent here.

Why the base date for calculating your commercial lease outgoings is important if you’re on a semi-gross lease

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 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.

Read more about what a base year is and some of the traps that can trip up tenants here.

How are commercial lease outgoings documented in a lease?

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.

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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