6 min read
Outgoings are the recovery of monies, by owners, from Tenants, for the management and maintenance of a building.
Many leases are fairly relaxed in their drafting around the outgoing clause and some landlords see outgoings as an opportunity for additional revenue generation, or recovery of costs that should not be charged to the tenants.
Outgoings are rarely challenged by tenants, and if they are,it is difficult to get the information needed to properly evaluate whether there has been a fair recovery of cost. The industry would benefit from an agreed standard which is balanced and fair to both landlords and tenants and governs what and how building outgoings are to be recovered.
The market rental value of a building is assessed on a gross rent basis, ie including outgoings. If there are two identical buildings in comparable locations with the same market gross rent and one of the buildings has a higher outgoing charge, then the net rent on that building will be less. Thus delivering the same market gross rent. If a building is charging excessive management fees,then it is the fund or owner of the asset, that is getting less net income as a result. Fund managers are not focussing on reducing outgoings so they can drive higher net income.
Here are some of the issues with current cost recoveries:
The landlord is responsible for structural repairs and keeping their property wind and watertight. This includes roof and window repairs and none of these costs should be recovered via the outgoings. All too often roof repairs, especially if they are minor, are included in the outgoings. All costs associated with maintaining the roof or windows or external walls should be the responsibility of the landlord and not recovered via the outgoings.
Other structural elements of a building include columns, structural walls, roof, foundations, slab and also hard stand of an industrial yard. The exception to this rule is if the tenant has misused the property and caused damage to the structure, in which case the responsibility for the repair of such damage would fall to the Tenant.
The management fees should be the cost of the building staff; care taking; facility / property management and administration, as they relate to the management of the building; responding to tenants and managing outgoing expenditure of the building (property management). Where a Property Manager works across multiple buildings then the cost of that person should be apportioned accordingly.
If the property manager performs asset management type activities,then those cost elements should not be recoverable from the tenant. When referring to asset management activities, these typically include:
- Negotiating a make good with a departing tenant.
- Coordinating capital or structural works.
- Negotiating a lease renewal of an existing tenant
- Negotiating a new lease with a new tenant.
In these current challenging economic times, corporates are looking at how they can reduce costs. There is often a mismatch between what the tenant wants and what the landlord is providing. What is consistent is that the tenant always pays.
I accept that in some buildings, tenants want a high standard of service and additional services such as concierge, additional security, someone to arrange dry cleaning, dinner reservations or travel arrangements.
Landlords should consult with their tenants to see if they want such services and whether they are prepared to pay for it. Buildings should have a list of core services and they may change between Premium, A and B grade buildings, but anything above that should be subject to the tenants approving its adoption.
A landlord/tenant relationship would often be improved by giving the tenant a say over the discretionary spend.
Generally, the landlord owns the building, however sometimes the landlord has a ground lease or a long leasehold interest over the property,and a ground rent is paid to the actual freeholder.
A ground rent, is a cost of owning the asset and a cost directly payable by a landlord . This cost should never be recovered from the tenant as part of the outgoings. I have seen numerous instances where a landlord has incorrectly, but consciously sought to include a ground rent in the outgoing recovery.
Most leases contain a provision where the outgoings are subject to an annual audit and reconciliation of charges. If the outgoings are disputed, the landlord often dismisses the dispute on grounds that the outgoings are already subject to an audit, and therefore must be correct. However, the audit is to ensure the actual costs recovered align with the actual costs incurred. They do not audit whether the costs recovered are allowable under the lease. If there is an industry standard, then perhaps the audit can confirm the recovery is in accordance with the standard.
Where land is owned or held in trust by a not for profit organisation, then the owner may be exempt from land tax. If so, the result is that the outgoings for such properties are less. However, landlords will often charge a higher net rent to give an overall market gross rent. This is all fine until the building is sold and land tax becomes payable resulting in an above market gross rent and there is no opportunity for the net rent to be reduced.Whilst I agree the financial saving should benefit the charitable organisation, the tenant needs protection if the building is sold to a non charitable organisation.
Similarly if the owner is a not domiciled in Australia then in some states there is a surcharge paid on land tax. This surcharge should not be recoverable from the tenant.
There is nothing more annoying for a tenant than a landlord saying they incorrectly charged the outgoings and they need to recover an omitted cost retrospectively. If the outgoings have been audited and the balance paid then there should not be a right for a recovery. If the outgoings are not audited then it should not be possible to go back more than 12 months. Many landlord’s may feel aggrieved at this but I have never had an experience where a landlord has offered a refund or credit due to an over payment due to a mistake.
Time for the RICS or PCA to do something that improves transparency and ensure proper recovery.
Property Beyond can provide specialist advice with regard to negotiating leases, interpreting leases, make goods and lease disputes. If you are a Tenant seeking to minimise risk and cost then please contact Property Beyond on 02 8094 1999
