Negotiating the base date for calculating your outgoings
Rent is likely to be only one part of your ongoing financial cost when you lease commercial or retail premises. Additional expenses (known as ‘outgoings’) can be passed on to tenants by property owners, provided they are documented accordingly in the lease.
So, two important items to consider when you’re a tenant negotiating the terms and conditions of your commercial lease are:
- The outgoings that will be your responsibility.
- The base date that will be used for calculating your outgoings.
Let’s delve a little deeper into these two key points of negotiation…
The first thing a tenant needs to understand is the types of outgoings that are associated with a commercial property. Common outgoings can include:
- 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).
Your commercial lease agreement
When it comes to 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 there are multiple tenants 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? Or, alternatively, are periodic payments made based on estimates of future expenses that are reconciled later?
Tip: Before you sign any 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 certain items.
Why the base date for calculating your outgoings is important
Landlords typically have a base date/year in the lease that is used to calculate increases in their outgoing recoveries from tenants. All future and past costs are usually indexed or compared to this year or date.
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 outgoings is earlier than the commencement of your lease agreement, it’s likely that 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.
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).
The base year is especially important when it comes to rent reviews.
Rent is likely to be one of your largest (if not THE largest) business expenses. If the base date and amount of a rent review are in the past and are to be used as the basis for your increase, that rent may also not accurately reflect current market conditions.
Note: Base escalations are not the same as rental escalations. Here’s why.
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.