Commercial real estate outgoings?
It can be a bit complex when trying to work out what the real cost is every week when moving into new leased premises. Not only do you have the moving & fit-out costs. You also have the ongoing cost of rent but also have to work out the sometimes sophisticated methods of calculating outgoings. Many potential tenants & investors ask what Commercial real estate outgoings are and what outgoings are they required to pay with commercial property leases.
To get a general idea, I like to think of property costs from a taxation angle. If the expenses are deductible expenses within the financial year, they can generally be classified as repairs and maintenance, thus included as part of the outgoings. On the other hand, capital expenses such as a new roof or lift are generally depreciable assets over a period of years and are paid for by the property owner.
Please note this is a general test. We recommend you consult your solicitor and accountant to get full verification.
Commercial real estate outgoings can be described as the expenses incurred in the general maintenance and running of a commercial building. Depending on the negotiation of the lease agreement, most If not all of these outgoings can be recoverable in commercial leases from commercial tenants within the financial year.
What outgoings should be documented in the lease agreement?
To ensure a comprehensive and transparent allocation of property-related expenses between landlords and tenants, thoroughly document the various outgoings with the help of an experienced commercial real estate agent/ coach within the lease agreement. By explicitly outlining these expenses and the corresponding percentage of the total property outgoings payable by individual tenants, both parties can operate within a framework that fosters accountability and understanding.
An experienced commercial real estate lawyer should fully document the expenses in the commercial property lease agreement. This set out the range of categories, each necessitating a more profound exploration to illustrate their significance and potential impact:
Building Insurance:
Building insurance coverage is critical to any lease agreement, safeguarding the property against unforeseen events such as fire, natural disasters, or vandalism. The lease agreement ensures that financial responsibilities are distributed equitably by specifying the tenant’s share of the insurance costs. For instance, if the annual building insurance premium amounts to $10,000 and the tenant’s allocation is 30%, the tenant would contribute $3,000 annually towards insurance coverage.
Body Corporate Fees/Levies:
The lease should delineate the tenant’s portion of fees levied by the property’s body corporate. These fees contribute to communal facilities, maintenance, and improvements. The lease agreement fosters transparency by detailing the exact portion the tenant is liable for. For instance, if the body corporate fees total $5,000 per annum and the tenant’s responsibility is 40%, the tenant’s annual contribution would be $2,000.
Property Management Fees:
Fees associated with the property’s management encompass services such as tenant liaison, maintenance coordination, and administrative tasks. The lease agreement avoids ambiguity by clarifying the tenant’s share of these fees. For example, if property management costs $2,500 annually and the tenant’s contribution is 20%, the tenant’s yearly payment would be $500.
Repairs and Maintenance:
The lease should specify the tenant’s obligation towards general wear and tear repairs and property maintenance. This includes routine upkeep and service contracts for air conditioning units, elevators, landscaping, and roof repairs. The commercial property lease agreement details these responsibilities and ensures the property’s proper care. For instance, if annual maintenance and repair expenses amount to $8,000 and the tenant’s assigned portion is 25%, the tenant’s annual contribution would be $2,000.
Land Tax:
The allocation of land tax expenses should be outlined in the lease agreement. While some leases place the responsibility on the landlord, others may stipulate a partial contribution from the tenant. Clear delineation avoids misunderstandings. If the annual land tax is $4,000 and the tenant’s share is 10%, the tenant’s yearly obligation would be $400.
Water and Council Rates:
Documenting the tenant’s portion of water and council rates is crucial for accurate expense distribution. These rates contribute to local services and utilities. By indicating the tenant’s allocated percentage, the lease agreement establishes accountability. For example, if annual rates total $3,600 and the tenant’s contribution is 30%, the tenant’s yearly payment would be $1,080.
Special Garbage Collection:
Any specialised garbage collection fees should be expressly detailed within the lease agreement. These charges relate to specific waste disposal services that benefit the property. By clarifying the tenant’s responsibility, the lease agreement prevents disputes. If special garbage collection costs $500 annually and the tenant’s share is 50%, the tenant’s yearly contribution would be $250.
In conclusion, the lease agreement is pivotal for transparently allocating property-related expenses among tenants. The lease agreement clarifies financial obligations by comprehensively documenting each category of outgoings and specifying the percentage borne by individual tenants. This approach ensures a harmonious landlord-tenant relationship and minimises potential disputes over expense distribution.
Retail Leases are relatively similar to commercial leases and can be subject to alternative methods And conditions as set out and described in the retail leases act.
Types of Property Outgoings
Outgoings for commercial property is paid to the landlord in various ways as outlined in the contract of lease. The most common methods are the following;
Net lease
With this method, the tenant Is usually charged separately to the rent regularly. The term could be monthly, quarterly, six-monthly or annually depending on what was negotiated at the commencement of the lease.
This outgoing’s expense is usually calculated from the actual number of outgoings paid in the previous year. From this, a budget is given to the tenant for this year’s schedule. Throughout the year, adjustments as per lease can be made for any variances from the actual and budgetary figure.
Gross Lease.
With this method, there is one payment which includes the rent and outgoings.
Direct Deduction Method.
Under this method, the tenant is charged as per the invoices paid by the landlord. This is usually done at the same time as a rent invoice.
What are recoverable outgoings in commercial leases?
Under section 70 of the Leases Act the landlord is only entitled to recover:
Reasonable expenses paid by the landlord in promoting a retail property in a shopping centre.
Statutory charges, taxes, rates and levies paid by the lessor.
Reasonable expenses in direct relation to the maintenance and repair of the property.
A commercial property lease that states a tenant to be liable for the outgoings must include provisions requiring the lessor to;
Account to the lessee at the end of the period for the actual expenditure compared with the estimate and make adjustments for any variances.
They must also give budgetary figures for future outgoings at particular intervals I stated in the lease.
How Are Outgoings Paid for Commercial Property?
There are several ways in which the tenant pays outgoings to the landlord. They include the following;
Usually, a new tenant is given an estimate at the start of the year. Depending on the commercial lease, the tenant may pay that estimated monthly amount for 3, 6 or 12 months. At the end of the year, an adjustment is made depending if the amount paid is either higher or lower than the estimate.
The other primary method is to charge every 3 to 6 months on amounts received during that period or send an invoice when the landlord gets each bill.
This is the fairest way because everything is always up to date, but it can be more work in invoicing all the time.
The method by which outgoings are paid could affect the property’s value and add to the landlord’s administrative costs and investment return.
For example, continually chasing up the tenant for the outgoings could cause problems with the landlord’s costs and cash flow. Additionally, the administration and possible legal expenses involved in chasing up invoices if not paid within a reasonable period as outlined in the lease.
I always encouraged my clients to get new tenants to pay quarterly in advance for cash flow purposes. Adjustments, if required, would be made at the end of the tenant’s year.
What should one do before entering into a lease?
For anyone considering a commercial property lease, there are a few crucial steps to take before diving in. These steps help the landlord and the tenant understand their responsibilities and ensure a smooth lease agreement. Here’s what you should know and understand:
Before Signing a Lease: What to Keep in Mind
When you’re a landlord (lessor) renting out a space or a tenant (lessee) looking to lease a property, there are essential things to remember. These steps ensure that both parties are on the same page and fully aware of their obligations:
For the Lessor or Landlord:
Before the lease is signed, the lessor (landlord) is responsible for being open about the costs that the tenant will need to pay. All these costs, called outgoings, must be mentioned in the disclosure statement document. This document is shared with the tenant before they sign the lease. It’s like giving them a clear picture of what they’ll have to pay in addition to the rent.
For the Lessee or Tenant:
As a lessee (tenant), you must carefully read and understand everything in the lease and the disclosure statement. These documents list all the details of your lease, including what outgoings you’re responsible for. The lease might mention the net lettable area, which is the space you’re renting. This is important because some costs are based on the size of the area you’re using.
The Key to a Successful Lease: Seek Professional Help
To make sure you’re making the right decisions and fully understanding your lease, it’s wise to get some professional help. A lawyer/solicitor specialising in commercial property law can be your guide. They’ll carefully read through the lease and disclosure statement and explain every little detail to you. This way, you’ll know exactly what you’re agreeing to before you put pen to paper.
Why This Matters:
Imagine signing a lease without knowing all the costs involved. It might lead to unexpected bills and confusion later on. Or, as a landlord, you might not adequately disclose all the costs, causing legal disputes with your tenant down the line. By following these steps with your commercial real estate agent/commercial property coach and seeking legal advice, you can avoid these pitfalls and ensure a fair and transparent lease agreement.
Whether you’re a landlord or a tenant, it’s crucial to be thorough and well-informed before entering into a lease agreement. Transparency and understanding on both sides contribute to a successful leasing experience and a positive relationship between all parties involved.
Contact Con Tastzidis on 02 9882 2221 if you would like to discuss this further or have any questions regarding your existing or potential commercial real estate investment or lease. CST Properties – Sydney based Commercial Real Estate Agents & Business Brokers.
