A gross lease includes rent as an amount that does not incur extra charges. Included in the rate (rent) a Landlord typically includes building expenses better known as Outgoings. These costs include such things as land tax, council rates, water rates, insurance, management fees, strata levies, repairs and repairs and maintenance.
It is considered easier to administer rent invoices with no requirement to complete a budget or reconciliation statements for tenants at the end of the financial year.
Landlords: If expenses increase above inflation (CPI) or fixed increases then the difference will come off your bottom line.
Tenants: You could be overpaying if the Landlords costs go down (or don’t increase in the same line as fixed increases or CPI).
A net lease is rent set as a base amount plus a contribution (proportion) to the payment of outgoings or expenses related to the property.
It is considered harder to administer by the Landlord (see gross lease) however it is easier to determine a Landlords net income position as there is no need to deduct annual expenses from the total rent received.
Landlords: Where a reconciliation of annual outgoings and outgoing contributions is required, there may be a shortfall payment due by the tenant. In this case tenants can scrutinise the expenses and there may be a delay in receiving full payment.
Tenants: The Landlord is passing unpredictable expenses on to you.
Outgoings – Retail & Commercial Leases
The Landlord must provide to the tenant prior to the commencement date and prior to each anniversary, budgeted outgoings that reasonably reflect the anticipated forthcoming annual expenses for the premises.
Audited statements for outgoings must be sent to the tenant within 3 months from the financial year expiry.
Providing audited outgoings is only necessary if it states so in the lease, on written request, for the previous year. Depending on the size of the building this could take up between 30 and 90 days. It is good business practice to audit a building’s outgoings.
Presenting budgeted outgoings to tenants depends on what both parties agree prior to entering into a lease. Outgoings may be payable by reimbursement in arrears; or payable in advance in accordance with forecast budget figures.
Retail & Commercial
If the costs are higher than the budget for that year, the tenant pays the pro rata amount over and above the budget and if costs are under the Landlord refunds the tenant.