Outgoings in a commercial lease: what tenants actually pay

What counts as an outgoing

Recoverable outgoings are the day-to-day costs of keeping the building operating and insured. In an Australian office building that normally means council rates, water and sewerage rates, building insurance, owners corporation or body corporate fees, cleaning and waste removal for common areas, security, essential-services and fire compliance, lift maintenance, air-conditioning maintenance, common-area power, and a building management fee.

Land tax sits in a category of its own. It is commonly recoverable under a standard commercial lease, but it cannot be recovered from a tenant whose lease is covered by the Retail Leases Act 2003 in Victoria — which catches more office and warehouse tenancies than most people expect.

What a landlord should not be passing on

Outgoings are running costs, not investment. Capital works — replacing a chiller, upgrading a lobby, structural repairs — improve the landlord's asset and are normally excluded, as are depreciation, interest on the landlord's borrowings, and the cost of leasing vacant space in the building.

These exclusions are only as good as the wording. A broadly drafted outgoings clause with a catch-all "and any other cost incurred in relation to the building" can pull capital items back in, so the definition is worth reading closely before you sign.

How your share is calculated

Your proportion is your lettable area divided by the total lettable area of the building, so a 500m² tenancy in a 10,000m² building carries 5% of recoverable outgoings. Check which area standard is being used and whether the denominator is the total lettable area or only the area currently leased — the second version makes you pay for the landlord's vacancy.

Estimates and the annual reconciliation

You will be given an estimate at the start of each accounting year and billed monthly against it. After year end the landlord reconciles the estimate against audited actual expenditure and either invoices the shortfall or credits the excess.

Two questions are worth asking before you sign: how accurate have recent estimates been, and is there a cap on how far a reconciliation can exceed the estimate? A pattern of large catch-up invoices is a budgeting problem regardless of how reasonable the underlying costs are.

What to check before signing

Ask for the current outgoings estimate expressed per square metre per year, the last two reconciliation statements, the full definition of outgoings from the draft lease, and confirmation of whether land tax is included. If the building is being repositioned or has ageing plant, ask specifically how capital works are treated.