Are you looking into entering a commercial lease? There are a number of legal considerations that anyone considering entering into a commercial lease should take into account, but there are also many financial obligations that deserve equal consideration. This article is part one of a four-part series on the costs of a commercial lease. It will look at the two main costs: Rent and outgoings.
The rent you pay is the amount that you owe the landlord on a regular basis for using and occupying the premises. There are several ways to express rent in the initial lease agreement. It can be expressed as “before” outgoings, “excluding” outgoings, or “including” outgoings. Including simply means that the rent is the gross rent or total amount that will be owed to the landlord on a regular basis.
“Net rent”, on the other hand, refers to rent paid to the landlord before outgoings are taken into account. Depending on the terms of the lease, the rental amount will usually be reviewed at regular intervals. Another measurement for determining the rental amount is to look at the size of the site and to work out a dollar amount per square metre, i.e. $x/m2.
Part of the reason why rent is sometimes quoted without outgoings is because it gives the impression to prospective tenants that the rent is lower.
Outgoings are paid on top of rent, so it is important to establish early on exactly what you will owe the landlord under the terms of the lease.
The lease agreement will specify the nature of the outgoings for which you will be liable to pay. You will be liable to pay a certain percentage of these outgoings, usually set out in the schedule. Typically, tenants will pay 100% of outgoings for the premises from which they operate. Otherwise, if your shop is part of a larger complex, you may only be liable to pay in outgoings whatever portion of the complex your shop represents.
Outgoings are actually the operating expenses that a landlord pays to own and run the premises. They include things like:
- Cleaning and maintenance;
- Strata levies and owner’s corporation fees;
- Land tax;
- Water and council rates; and
- Security and management.
Another expense to keep in mind if you are a tenant in a shopping centre is the contribution you are sometimes required to make to promoting and advertising the centre itself.
Sometimes you will be charged ‘increases in outgoings’, which refers to the increased amount above which the landlord is required to pay. So, for example, if you are liable to pay increases in outgoings at 2 August 2015, and the water rates increased on that day from $500 to $550, you will have to pay the remaining $50. On top of rent and outgoings, sometimes tenants are required to pay interest in the event that, for example, you fall into arrears with your rental obligations.
Rent and outgoings are the most sizeable costs involved in any commercial lease and are the most important to negotiate before entering into one. For assistance negotiating, contact LegalVision on 1300 544 755.
Check out part two on “What are the costs of a commercial lease?”