For Australian retail, office, and industrial tenants, the single most critical commercial contract term is how building outgoings are allocated. Failing to distinguish between a gross lease proposal and a net lease structure can lead to thousands of dollars in unexpected annual occupancy costs.
The Core Difference: Gross vs Net
The distinction between these two lease types is fundamentally about who bears the risk of rising property holding and maintenance costs.
- Gross Leases: The tenant pays a single, all-inclusive rental payment. The landlord is entirely responsible for covering all building outgoings, including municipal council rates, water rates, body corporate strata levies, building insurances, and land taxes out of this rental amount.
- Net Leases: The tenant pays a lower base rent (known as face rent) but must also pay all or a proportionate share of the property's operating outgoings on top of that base rent. These outgoings are usually billed monthly alongside the base rent as an estimated contribution, which is then reconciled annually against actual costs.
What Are Included in Commercial Outgoings?
In Australia, standard property outgoings typically fall into several main categories:
Standard Outgoings Checklist
- Council Rates: Municipal charges levied by local governments (e.g. Brisbane City Council, City of Sydney).
- Water Rates: Water supply service charges and sewerage access levies.
- Strata/Body Corporate Levies: Administrative and capital fund levies for properties under a strata title.
- Building Insurance: Public liability and building replacement insurance premium shares.
- Land Tax: State-level taxes calculated on the unimproved value of the land.
- Operational Expenses: Air conditioning maintenance, cleaning of common areas, security, and fire safety systems.
The Crucial State-Based Legal Protections
It is crucial for retail tenants to know that state-specific legislation protects them. Under retail lease laws in most states (such as the Retail Leases Act 1994 (NSW) and the Retail Leases Act 2003 (VIC)), landlords are legally prohibited from passing on state land tax to retail tenants, even under a net lease.
Furthermore, landlords must provide a detailed outgoings disclosure statement before a retail lease is signed. If an outgoing is not listed in this disclosure statement, the tenant is often not legally required to pay it. For non-retail commercial or industrial leases, these statutory protections do not apply, meaning land tax and other expenses are fully negotiable and recovery is determined solely by the agreed lease text.
A Worked Outgoings Comparison
Let us consider a boutique office suite in North Sydney of 120 square metres. The landlord offers two prospective options:
Option A: Net Lease
Base Rent: $450/sqm p.a.
Estimated Outgoings: $110/sqm p.a.
Total Cost: $67,200 per year
($56,000 + $11,200 in outgoings)
Option B: Gross Lease
Base Rent: $540/sqm p.a.
Outgoings: Included ($0/sqm)
Total Cost: $64,800 per year
($64,800 flat rental commitment)
In this scenario, Option B is actually cheaper by $2,400 per year, and it removes the risk of outgoings increasing unexpectedly during the year due to rising council rates or body corporate building insurance adjustments.
Model Your Outgoings Structure
Use the commercial rent calculator to enter your rate per square metre and each outgoing, switch between a net and gross lease, and see the same deal restated the other way.
Go to the commercial rent calculator