Negotiating a commercial lease is tricky. One of the biggest items on your terms sheet, second only to the rent itself, are the outgoings.

In this article we’ll address the question of “who pays outgoings?” and much more.

Who Pays Outgoings in a Commercial Lease?

Well… It depends. There are no hard and fast rules when it comes to commercial property. There is certainly no right or wrong way to do it. As a general rule of thumb, on smaller leases the landlord will pay for all outgoings. On larger leases, say anything over $50,000 per year, the tenant will usually pay for outgoings on top of their rent.

What are Outgoings?

Before we go too carried away with the details, what exactly are outgoings? “Outgoings” generally refers to any costs associated with running the commercial property. They will be itemised in each lease, but the main four are:

  • Council Rates
  • Water Rates
  • Land Tax
  • Insurance

Gross vs Net Rent

Perhaps you’ve seen the words “Gross” or “Net” when referring to the rent attached to a commercial property.

For example – “$50,000 +GST per year, gross”

This means that all outgoings are included in the $50,000. On the flip side, if you see “$50,000 +GST per year, net” then outgoings would be on top of the $50,000.

So, Which is Better?

While there is no right or wrong way to do it, we recommend negotiating a net rent with your tenant. Why? If, for example, your land tax goes up by 50% one year, and you have a “gross” lease with your tenant, then you, as the Landlord, will be liable for this increase. If you had a net lease, the increase would be passed on directly to the tenant.

One of the nice advantages of investing in commercial property vs residential property is the fact that you can charge outgoings to your tenant, so why not make the most of it?

Increase in Outgoings

Depending on the rent you are charging, and a number of other factors, you may not be able to charge outgoings. The prospective tenant might refuse to agree!

In this case, we have a simple compromise. The tenant will pay any increases in outgoings over and above a pre-agreed amount.

This way, if your land tax does increase by 50%, your tenant will pay only for the increase, and you pay for the original amount.

Budgeted vs Direct On-charge

There are two ways to charge your tenants for outgoings.

The most basic method is commonly known as Direct On-charge. Whenever a bill comes in, it is paid an invoice is created to the tenant to recoup the costs.

The second method, more common on very large properties, is to budget for outgoings. In this method you estimate the monthly outgoings, charge the tenant each month, then do a reconciliation at the end of each year to account for any over or underpayment.

Sounds complicated right? In either case, this is something your property manager will take care of.

Hopefully this post helped you get a better understanding of outgoings. If you have any other questions at all please get in touch here.

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