Outgoings in a Commercial Lease

Posted on Posted in Uncategorized

Commercial Tenants can often be shocked at the additional expenses incurred over and above the monthly rent and service charges for their leased property. Outgoings are payable by the Tenant, and it’s crucial to get it right in the lease so you’re not paying for charges that aren’t normally recoverable under a standard lease agreement. Also, it’s a good exercise to analyse the outgoings reconciliation annually, as in many cases we’ve seen, too often the Landlord will be passing on costs to the Tenant which they are not entitled to.

Outgoings are generally split into two categories, statutory outgoings and operating expenses.

Statutory Outgoings

Council Rates, Land Tax and Water Rates – If your lease falls under the Retail Leases Act, the Landlord is unable to pass on Land Tax to the Tenant. However, if you don’t fall under the Retail Leases Act, it is very likely the Landlord will be passing on the Land tax to you under the Lease. The main thing is to make sure your lease states that the land tax is to be charged on a single holding basis. Land tax is calculated and charged by the State Revenue Office, so that the more land the landowner owns, the higher the rate of land tax.

Operating Expenses

Insurance – It is typically standard for the Tenant to pay for the Landlord’s building insurance. This will be the insurance premium for the replacement of the building, and will also include loss of rent insurance so the Landlord receives rental income while the building is being rebuilt. With loss of rent insurance, you should try and cap this at 12 months in the lease agreement which is reasonable. Some Landlord’s will insure the Loss of Rent component well over what is required i.e. 36 months, more than likely because they are not the ones paying for it! There is generally no reason why a building should take 3 years to rebuild.

General Repairs and Maintenance – A standard lease agreement will normally require the Tenant to service and maintain the Landlord’s plant and equipment. Make sure the Lease has an exclusion for fair wear and tear and capital repairs, including replacement of major components or parts. The outgoings will include (if applicable) costs for regular servicing of equipment such as air conditioning units, lifts, roller doors, essential services etc. but you want to check that no costs are being on charged for any major repairs on this equipment.

Roof leaks/repairs – It is often the Tenant’s obligation to have the gutters cleaned. However, depending on what your lease states, it should be the Landlord’s obligation to keep the Premises watertight. Therefore, we’d argue that a Tenant should not be responsible for any costs associated with roof leaks, unless caused by blocked gutters.

Management fees – Landlord’s will often charge a management fee. This is one of our pet hates at Eve Property, and we would certainly not encourage our clients to accept this charge, especially if they have a standalone premises. If your site is part of an estate you are likely to have no choice and you’ll have to accept.

Landscaping – This is a cost which can quickly blow out and is something Tenant’s don’t budget for when initially entering a lease agreement. Some Landlords will try and charge the Tenant for landscaping new areas including the purchase of new trees/plants etc. You should only be required to maintain existing landscaped areas by way of maintenance with mowing, mulch etc.

Sinking Fund Levy – Another cost which Tenant’s must keep an eye out for is a sinking fund levy, which is normally bundled up in the body corporate fees. The Sinking Fund Levy is essentially a reserve fund for future major capital works often with a 10 year plan. A Tenant shouldn’t be responsible for paying for the building’s future capital works. If your site is in Victoria, and you are under the Retail Leases Act, then thankfully the Landlord can’t pass this charge onto you. However, if you don’t fall under the Act, or the property is in NSW, it will come down to your lease agreement and whether they have a right to charge you as to whether they can include in your outgoings.

If your premises forms part of an estate, outgoings may also include electricity for common areas (i.e. street lighting) security guard house, cleaning of common areas etc. You want to make sure that your proportion of outgoings does not mean you are left paying for costs which should be attributable to vacant areas. Removing vacant (not leased) areas from the total area calculation pushes up your outgoings percentage. The Landlord is responsible for vacant costs, not you.

The above list is not exhaustive, but we hope this gives you an idea about some of the areas to keep an eye out for. Make sure you request back up invoices/breakdown of costs from your Landlord to verify if any of the expenses look suspicious. We love getting knee deep in outgoings reconciliations so give us a call if you would like us to have a look at yours.