Tenants can often be shocked at the additional expenses incurred over and above the monthly rent and service charges for their leased property. If the lease is set up as a net lease, then 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.
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. The main thing is to make sure your lease states that the land tax is to be charged on a single holding basis, not subject to any trust surcharges and the discount for paying on time, must be passed through to the tenant. 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 is payable. Try not to zone out here, because this is where we generally find the biggest windfalls for our clients, especially occupiers of industrial sites which occupy large landholdings. If your lease does state the landlord should only be charging on single holding, it’s important to check the landlord is not charging based on multi holding as the difference is significant. In addition, land tax is assessed over land area by the SRO not building area. Your lease should also reflect this. If you’re part of a large industrial estate, you’ll want to make sure that the landlord is not charging you for any vacant land within the estate. You wouldn’t believe how many times we’ve found landlords splitting the land tax over the whole site just between the tenants who occupy the estate without taking up any cost themselves for vacant or unoccupied land.
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 or a period which is a reasonable length of time for the building to be rebuilt. Some landlords will insure the loss of rent component well over what is required i.e. 36 months. There is generally no reason why a building should take 3 years to rebuild unless it is a large, complex industrial site.
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 which have reached end of life. The outgoings will include (if applicable) costs for regular servicing of equipment such as air conditioning, lifts, roller doors, fire services, docks etc. but you want to check that no costs are being on charged for any major repairs on this equipment. Often a tenant will undertake their own preventative maintenance and the outgoings should only include costs the Landlord has incurred for the common areas of the estate. Another really important thing to check is that you are not being charged for another tenant’s repairs. Yes, this does happen. The best way to check this is to request back up invoices and manually check through them. This is time consuming but often well worth the effort.
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 structurally sound and 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 occupy a stand-alone premises. However, if your site is part of an estate you are likely to have no choice and you’ll have to accept. If this is the case, we suggest between 1 and 2% net rent is reasonable. You want to make sure though, that the landlord is not charging for building supervision fees in addition to management fees. Best practice is to ensure your lease states the management fee is to include all building supervision, onsite staff wages etc. When reviewing the outgoings rec, check the landlord is only charging the management fee percentage based on net rent assuming that is what is outlined in the lease agreement.
Landscaping – This is a cost which can quickly blow out. Some landlords will try and charge the tenant for landscaping new areas including the purchase of new trees/plants etc. In an estate, also check you are not paying for the maintenance and upkeep of vacant areas. You should only be required to maintain existing landscaped areas by way of maintenance with mowing, mulch etc.
Sinking Fund Levy – Another cost which tenants 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 i.e. roof replacement, new lifts etc. 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 located out of Victoria, 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. As I explained above, the Landlord is responsible for vacant land costs, not the existing tenants.
The above list is not exhaustive, but we hope this gives you an idea on what 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 get in touch if you would like us to have a look at yours.