Commercial Outgoings Explained: Net vs Gross Leases

Outgoings are the running costs of owning a commercial property. Council rates, building insurance, land tax, maintenance, management fees and common-area utilities keep arriving whether the property is tenanted or empty. The lease decides who pays them, and that single question is what separates a gross lease from a net lease. Two properties with the same advertised rent can produce very different net incomes once the outgoings treatment is read properly, so a buyer who cannot read an outgoings schedule cannot price the asset.

This guide covers what outgoings include, how net and gross structures allocate them, which costs are recoverable from tenants, why statutory charges deserve their own line of analysis, how the treatment changes the real yield, and how to audit an outgoings budget during due diligence.

What Outgoings Cover

Outgoings fall into three broad groups, and each behaves differently over time.

Statutory charges

Council rates, water and sewerage service charges, land tax, and emergency services levies where a state imposes them. Governments set these, they rise on their own schedule, and better property management cannot reduce them. They also reset abruptly: a municipal revaluation or a land tax reassessment can move a statutory line sharply in a single year.

Operating costs

Building insurance, property management fees, cleaning of common areas, security, fire services testing and essential safety measures compliance, lift and air-conditioning maintenance, gardening, pest control and waste removal. In a multi-tenanted building these are usually apportioned between tenancies by share of lettable area.

Utilities

Electricity, gas and water for common areas and base building plant. Consumption inside a tenancy is usually separately metered and billed straight to the tenant, so it sits outside the outgoings statement altogether.

What outgoings exclude matters just as much. Capital expenditure (a roof replacement, a chiller upgrade, structural repairs, upgrading services to meet a new code) is generally a landlord cost that cannot be passed through as an outgoing. The same goes for the landlord's interest costs, depreciation, and the costs of leasing the building, such as agent commissions and incentives. A long lease with full outgoings recovery still leaves the owner carrying the capital works program, a point worth holding onto when a listing describes an asset as a set-and-forget investment.

Gross, Net and the Structures in Between

Lease structures sit on a spectrum, and the labels are used loosely in practice. The lease document itself is the only reliable statement of who pays what. Our guide to commercial lease types covers the full family; the short version follows.

Gross lease

The tenant pays a single rent figure and the landlord pays the outgoings out of that rent. The landlord carries the risk of outgoings inflation. A common variant, often called semi-gross, fixes a base year: the landlord pays outgoings up to the base-year level and recovers any increase above it from the tenant.

Net lease

The tenant pays rent plus a defined share of outgoings, itemised in the lease. Most Australian office, industrial and non-retail commercial leases are written this way. The rent is quoted net, and the outgoings are billed separately against an annual estimate with a reconciliation at year end.

Triple net lease

The tenant pays substantially all property costs, sometimes extending to structural repairs and capital items. True triple net terms are less common in Australia than the label suggests and appear mostly in single-tenant deals such as sale-and-leasebacks with corporate tenants. Read the repair and capital clauses closely before accepting the description.

Tenants price the whole package. A tenant comparing premises looks at total occupancy cost, so a gross rent tends to sit above the equivalent net rent by roughly the expected outgoings. Structure changes who carries the risk of outgoings growth and vacancy, and that risk allocation is what a buyer is actually pricing.

Recoverable vs Non-Recoverable Outgoings

An outgoing is only recoverable if the lease says so, and even then only if any statutory disclosure obligations were met. Three layers decide the question.

The lease comes first. The outgoings definition, the recovery percentage, the apportionment method and any caps or exclusions are all contractual. Older leases and poorly drafted leases often omit line items that a landlord assumes are recoverable, and a court will read ambiguity against the party that drafted the clause.

Retail legislation comes second. Every state and territory has retail leases legislation that restricts recovery for premises it covers. The detail varies by jurisdiction, but common features include mandatory disclosure statements with annual outgoings estimates, audited reconciliation statements, and prohibitions on recovering particular items. Land tax is a well-known example: some states, including Victoria and Queensland, prohibit recovering it from tenants under retail shop leases, while others permit recovery on a restricted basis, so confirm the current position in the relevant state before underwriting the recovery. Outgoings that were never disclosed in the disclosure statement may be irrecoverable regardless of what the lease says. If any tenancy in a target property could be caught by retail legislation, the outgoings clauses need a lease-by-lease legal review, because a cafe or a medical suite on the ground floor of an office building can be enough to bring parts of the statute into play.

The capital boundary comes third. Repairs and maintenance are generally recoverable under a net lease; capital improvement generally stays with the landlord. The boundary is grey in exactly the places that cost the most money. Replacing a failed compressor within an air-conditioning system reads as maintenance, while replacing the whole plant reads as capital, and a vendor's budget can bury one inside the other.

Vacancy sits behind all of this. Outgoings recovery follows occupancy, so the owner pays the vacant suite's share of every line in full while it stays empty. A building with structural vacancy recovers well short of its full outgoings even if every lease is drafted perfectly, and the shortfall lands on the net income line.

Statutory Outgoings Deserve Their Own Line

Statutory charges behave differently from the rest of the budget, and land tax is the sharpest example. Most states assess land tax on the aggregated taxable landholdings of the owner, with marginal rates that climb as the total grows. The vendor's land tax bill therefore reflects the vendor's portfolio and structure. Your bill will reflect yours. A buyer with substantial existing holdings in the same state can face a materially higher assessment on the same property, and many leases only permit recovery on a single holding basis, which caps what can be passed on. Surcharges that attach to trusts, companies or foreign owners in some states are frequently excluded from recovery by the lease drafting. Our state-by-state land tax guide covers the mechanics.

Council rates and water charges move with municipal budgets and statutory valuations. They rarely fall. Emergency services levies apply in some states and are collected through rates or insurance depending on the jurisdiction. None of these lines care about the rental market, which is exactly why they need separate forecasting: a soft leasing market can hold rents flat in a year when statutory charges jump, and under a gross lease that whole squeeze lands on the owner.

How Outgoings Treatment Changes the Real Yield

Advertised yields are only comparable once the income behind them is put on the same basis. A yield quoted on a gross rent overstates the position of a property where the landlord pays outgoings, and comparing a gross-lease asset with a net-lease asset on face rent alone will mislead in both directions. The arithmetic is simple. Take two properties with the same passing rent. One is a net lease where the tenant also reimburses effectively all outgoings, so the owner keeps close to the full rent. The other is a gross lease where the owner funds the entire outgoings bill out of that rent, so the owner keeps materially less. At the same asking price the real yield gap between them is wide even though the brochures look identical.

Recovery is also rarely perfect even under net leases. Vacancy carry, statutory restrictions on retail tenancies, capped recoveries, non-recoverable capital items and simple administrative leakage all pull the effective recovery rate below the drafted one. The honest income figure for valuation purposes is fully reconciled net income after real recoveries, and that is the figure a cap rate should be applied to. Our guide to cap rates, gross yield and net yield works through the metrics side of the same problem.

Outgoings growth matters as much as the current level. Under a gross lease with fixed annual rent increases, every year of outgoings inflation above the increase rate erodes the net margin. Under a net lease the tenant absorbs that inflation. Two assets with identical day-one net incomes can diverge meaningfully over a five-year hold purely on this mechanism, which is why lease structure belongs in the pricing decision and never just in the legal review.

Auditing an Outgoings Budget

Before settlement, the outgoings budget is a vendor document, and it deserves the same scrutiny as the rent roll. A practical audit sequence looks like this.

1. Obtain actual outgoings statements for the last two to three years alongside the current budget. Compare actuals to budget line by line. A budget that sits consistently below actuals is being used to dress the net income.
2. Reconcile recoveries against expenditure. What was billed to tenants, what was actually collected, and what was spent? The gap is the true recovery rate, and it is the number to underwrite.
3. Check the apportionment. Tenancy shares should be based on surveyed lettable areas and should account for the whole building between them. Confirm the budget shows the landlord carrying the share attached to any vacant suite instead of quietly spreading it across the remaining tenants.
4. Read each lease's outgoings clause against the budget. Confirm every budget line is actually recoverable under each lease, flag caps and exclusions, and test retail tenancies against the relevant state legislation.
5. Hunt for capital expenditure hiding in repairs and maintenance, and for the opposite problem, maintenance deferred to flatter the budget. A suspiciously low repairs line on an older building usually means the spending is coming, and it will arrive on your side of settlement.
6. Rebase the land tax line for your own ownership structure and aggregated holdings rather than adopting the vendor's assessment.
7. Interrogate the management line. A self-managing vendor may show no management fee at all, and insurance is commonly re-rated on sale, so both lines can step up under new ownership.

This work folds into the broader investigation covered in our commercial property due diligence guide, and the outgoings audit is one of the places where a week of paperwork routinely changes the price a buyer should pay.

Bringing It Back to the Purchase Decision

Normalise every opportunity to fully reconciled net income before comparing yields, and treat the vendor's outgoings budget as a starting claim to be verified. Price the structure as well as the income: a gross lease transfers outgoings risk to you, a net lease leaves it with the tenant, and the market will generally have priced some of that difference already. Expect your own first-year outgoings to differ from the vendor's history once land tax rebases, insurance re-rates and a manager is appointed. Buyers who do this arithmetic before the contract, with lease-level legal review on anything retail, buy the income that actually exists.