In a previous blog, [Commercial Property Outgoings Explained] we unpacked the basics of commercial property outgoings — those operating expenses landlords incur in the ownership of a property, and which are often recoverable from tenants under the lease agreement. We covered the difference between statutory and operating outgoings, explored common recovery models, and explained the importance of budgeting and reconciliation.
In this follow-up, we take a more detailed look at the complexities involved in managing and recovering outgoings across commercial leases — from offices to warehouses to retail shops — and explore how these costs affect valuation, negotiation, and compliance. Importantly, we’ll also highlight the nuances that apply specifically to retail leases in New South Wales (NSW), where additional legislation governs what costs can be passed on to tenants.
Whether you’re a seasoned investor, an owner-occupier, or a tenant looking to better understand your obligations, this deeper dive will provide the clarity you need to manage outgoings with confidence.
1. Understanding Outgoings Across Lease Types
Outgoings can broadly be split into two categories:
- Statutory Outgoings: Council rates, water/sewerage rates, land tax, emergency services levies.
- Operating Outgoings: Building insurance, cleaning, gardening, security, air-conditioning maintenance, fire protection services, management fees, and utilities for common areas.
In most commercial leases — whether office, industrial, or retail — these outgoings are recoverable from the tenant, but the method and extent of recovery depend on:
- The lease structure
- Negotiated terms
- Applicable legislation (particularly for retail leases)
Let’s explore these complexities.
2. Legal Framework: Retail vs Non-Retail Leases
Retail Leases in NSW: A Different Set of Rules
The Retail Leases Act 1994 (NSW) introduced consumer protections for retail tenants that limit what landlords can claim as recoverable outgoings. If your property falls under the definition of a “retail shop lease” (generally a premises used wholly or predominantly for the sale or hire of goods or services to the public), then:
- Land tax can only be recovered on a conditional basis. Section 26 of the Act permits recovery of land tax attributable to the leased retail shop, provided the lease includes that obligation. However, the tenant’s liability is limited to the amount the lessor would have paid if the land were owned as a single holding, without concessions or multi-property aggregations.
- Capital costs (such as new plant/equipment or structural repairs) are generally not recoverable.
- Legal costs of preparing or negotiating the lease cannot be passed on.
- Landlords must issue a Disclosure Statement prior to the lease commencement that clearly outlines an estimate for each outgoings charge recoverable under the lease.
Office and Industrial Leases
In contrast, leases for office space or industrial warehouses are governed primarily by contract law rather than a specific Act. This gives parties greater freedom to negotiate cost recovery — including the ability to pass on land tax or even costs for major works, if agreed.
Key takeaway: Always identify whether your lease falls under the Retail Leases Act and, if so, ensure compliance with NSW-specific provisions.
3. Budgeting, Reconciliation & Transparency
For multi-tenanted buildings or industrial estates, landlords typically issue tenants with an estimated annual budget of outgoings at the start of each lease year. These are then reconciled at the end of the year to determine if the tenant has under- or overpaid.
- In a retail lease in NSW, this budgeting and reconciliation process must comply with strict timing and disclosure obligations under the Act.
- In non-retail leases, timing and format are determined by the lease terms, although best practice is to follow similar timelines for clarity and professionalism.
Landlords must maintain full transparency, and tenants should be provided with copies of invoices or audit summaries as part of the reconciliation process.
4. Apportionment and “Grossing Up”
In multi-tenanted properties, outgoings are usually apportioned based on the lettable area each tenant occupies. For example, if you lease 20% of a building, you would typically pay 20% of the total outgoings.
However, things get more complicated when there are:
- Vacancies in the building
- Tenants who are exempt from certain charges under their lease
- Tenants who operate outside typical hours, increasing security or cleaning costs
In these cases, landlords often apply a “gross-up” formula — inflating recoverable costs to reflect what would have been paid had the building been fully occupied. This is particularly relevant in industrial estates or office towers where usage patterns and tenant arrangements vary.
5. Lease Structures and Recovery Models
There are several lease types that influence how outgoings are treated:
- Net Lease: The tenant pays a base rent plus all outgoings.
- Gross Lease: The landlord pays all outgoings; rent is set at a higher level to absorb these costs.
- Semi-Gross Lease: The landlord pays some outgoings (typically statutory), and the tenant covers others.
Each model has advantages, and the choice often depends on the market norms for that property type. In industrial property, for example, net leases are most common. In contrast, retail landlords in shopping centres often use semi-gross leases with detailed provisions for specific recoveries.
6. Key Negotiation Points and Common Disputes
Understanding which outgoings are negotiable is vital in lease negotiations. Key areas of contention include:
- Land Tax: Recoverable on a conditional basis in NSW retail leases, but often recoverable on an unconditional basis in office and industrial leases.
- Management Fees: Often capped or excluded in retail leases, but typically recoverable elsewhere.
- Capital Works: Distinguish between routine maintenance (recoverable) and capital upgrades (non-recoverable).
- Admin Charges: Should be clearly itemised to avoid duplication (e.g., landlord charging both admin fee and separate management fee).
Disputes often arise when landlords attempt to recover costs not disclosed in the original Disclosure Statement (retail) or where lease terms are ambiguous. Clarity when agreements are prepared entered helps avoid such disputes.
7. The Investment Lens: Outgoings and Property Valuation
For investors, outgoings significantly impact the Net Operating Income (NOI) of a property. Since valuation methods (especially capitalisation rate approaches) are based on net income, an investor must understand:
- Which outgoings are landlord liabilities vs tenant recoveries
- How vacancy and non-recoverable costs affect cash flow
- Whether there are cost caps that could limit recoveries over time
A well-structured lease that allows recovery of most operating expenses (without caps) can lead to a higher property valuation, making these clauses crucial in asset planning and due diligence.
8. Best Practice Tips for Landlords and Tenants
For Landlords:
- Clearly outline all recoverable outgoings in the lease.
- Provide annual budgets and timely reconciliations.
- Be mindful of retail-specific restrictions and comply with disclosure rules (if the lease is subject to the Retail Leases Act).
- Avoid overreaching or bundling costs ambiguously
For Tenants:
- Review and negotiate the list of recoverable outgoings before signing.
- Ensure any cost caps or exclusions are in writing.
- Request detailed outgoings budgets and reconciliations annually.
- Understand whether your lease falls under the Retail Leases Act and know your rights.
Conclusion
Outgoings may seem like a technical detail, but they play a critical role in the financial performance, compliance obligations, and relationships between landlords and tenants in all types of commercial property.
By understanding the distinctions between lease types — and the specific requirements that apply to NSW retail leases — landlords can manage their properties more effectively, while tenants can ensure they’re only paying for what’s fair and lawful.
If you’re reviewing a lease or planning your next commercial investment, don’t underestimate the value of taking a deeper dive into the outgoings. If you’re looking for assistance in this area, please feel free to reach out to our team.
