The majority of net type leases deal with the tenants’ payment of outgoings in the preparation of the combined annual budget. This consequently determines the amount of the monthly contribution. At the end of the financial year an audit has to be prepared, comparing actual expenditure with the estimated (budgeted) figures for the year. The tenants’ payment is then adjusted accordingly. This system is a very practical way to control and measure most of the fees, charges and impositions for a particular property. The Retail and Commercial Leases Act regulates the recovery of outgoings from the tenant and sets out when and how these procedures must take a place. This article contains our selection of key facts and our views about this very important topic.

Using a budget as a mechanism for controlling and measuring outgoing expenses should be beneficial not only for the landlord but also for the tenant. If done correctly, it will provide the tenant with a reasonable estimate of the total cost of renting the property and minimise the spikes caused by major outgoing items (it is easier to pay it through regular equal payments than paying the total cost of expenses when they arise). In addition, the tenant can use the annual budgeted figure to assist in forecasting his/her own financial targets.

When preparing a budget the property manager must keep in mind the importance of the estimate and perform all of the necessary inquires in order to keep projections as realistic as possible. Of course, some expenses will have to be anticipated (educated guesses). The point is that the property manager has to be "switched on" all year around and be attentive to all variables which could affect this calculation. A Councils' decision to switch to differental rating system (in doing that significantly increase rates for C&I landlords), increased cost of utilities for common areas or introduction of new regulatory cost (i.e. fire prevention, waste treatment or storm water management) could change tenant's contribution significantly.

While these budgets can be prepared by the commercial property manager on behalf of the landlord, in most cases the audit has to be done by a registered auditor. The only exception is when the tenant is only responsible for statutory outgoings and all the outgoings are relating to the particular property. In that case, the audit can be undertaken by the commercial property manager/landlord and must be supported by copies of related expenses.

In our opinion, property managers are not alone in their need to be aware of relevant changes in relation to outgoings. There was a time when the landlord was not too concerned about outgoings because they knew that these costs would be recouped through the tenant, but those days are now over. In this current economic climate, the landlord’s engagement and involvement can be the difference between a successful commercial property and financial disaster. This is indeed the case with a landlord’s involvement (or lack of it) in strata/community body corporates and related expenditure.

Another potential issue arises in “leasing only” scenarios. How experienced and knowledgeable is the leasing manager in dealing with outgoings and with the prevailing local conditions? If the actual figures from the current or previous year are simply copied into the leasing documentation, the future audit could show some serious discrepancies. This kind of error can potentially result in high turnover of tenants and subsequently, an increase in leasing and advertising costs.

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