What are Recoverable Outgoings?
Recoverable outgoings are the property owners’ reasonable expenses for a commercial property that can be passed onto the tenant. The outgoings that can be recovered from the tenant will depend on the definition of recoverable outgoings in the lease, and any limitations under legislation.
Recoverable outgoings can include expenses such as:
Statutory costs ie Rates (incl. Water & Sewerage charges), Land Tax
Building Insurance, Body Corporate Fees, Property Management Fees
Repairs, cleaning, gardening, rubbish removal, fire protection and maintenance (ie airconditioning).
Recoverable outgoings generally exclude capital expenses (ie the replacement of the airconditoning unit) and development costs.
How are Outgoings Recovered?
Again, the method for recovering outgoings will be set out in the lease. Typically, there are two methods of recovering outgoings:
Direct recovery is a process of invoicing the Lessee the expense on receipt of the invoice received for payment. The invoice is paid from the Owners ledger (or the owner direct) and the cost recovered from the Lessee. As rates and body corporate expenses are often quarterly, the method can cause cash flow issues for the Lessee. Sending “one-off” invoices to Lessees can result in frequent and unnecessary disputes and delays.
Recovery by budget and reconciliation
The Lessee receives a monthly tax invoice that includes a rent and an outgoings charge. The outgoings charge is calculated by the preparation of a budget and divided into 12 monthly instalments. The budget estimates the recoverable outgoings for the coming financial year. At the end of the financial year the outgoings income received is adjusted as required.
Here is an example of a strata title factory budget:
Annual Estimate Outgoings budget for 1 July 2020 to 30 June 2021
Council Rates: $2600
Body Corporate Fees: $5000
Management fees: $2000
Land Tax: $1200
Estimated Outgoings per annum: $10,800 per annum
In addition to rent, the Lessee will be charged outgoings each month at $900 per month + GST.
At 1 July 2021 we can total the actual outgoings expenditure. Using the example budget above, if the actual outgoings expenditure totals $10,000 pa, the amount of $800 will be refunded to the Lessee. Alternatively, if the actual outgoings total $11,000 pa, the Lessee will be charged an additional $200.
What happens if there are multiple leases within one premise?
If there is more than one lease within a property, the outgoings are generally apportioned based on the lettable area that the premises bears to the total lettable area of the property. The lease itself must establish how outgoings will be calculated and apportioned.
It all comes back to the Lease and the terms negotiated, together with the quality of the Lessee. Make sure you engage with commercial property specialists when it comes to leasing premises and the preparation of leases.