Many Landlords are faced with a choice when negotiating a Commercial Lease; to have the rent paid on a Gross or Net basis.
A Net Lease means that the Tenant pays rent in addition to the outgoings, a gross Lease is when the outgoings are included in the rent.
With a Gross Lease the total payable amount of outgoings is negotiated into the rent, for example, if the Landlord wanted a rent of $90,000 per year and the outgoings were $10,000, in theory the rent negotiated will likely be $100,000. Some see this as being “cleaner” as the Tenant simply pays rent to the Landlord, and the Landlord or their agent pays the outgoings. They consider that easier to manage and in a lot of respects that is true. But consider that the annual increases for the property were 3%, but after the first-year outgoings such as Council Rates and Water Rates increased by 4% and say insurance increased by 8% (which depending on the circumstance can sometimes happen), the Landlord is losing out a few hundred dollars. This loss is compounded on a yearly basis if similar increases occur.
On a Net Lease, the Tenant is liable for the outgoings payments and any reasonable increase in cost is payable by them. However, if for whatever reason the outgoings remain the same or less than the increases in your Lease, you lose out on the increase in outgoings you would have enjoyed on a Gross Lease.
Typically, whilst outgoings are unpredictable, they almost always go up and in the minimum range of 3-4% but from time to time skew much higher. Although councils in Victoria, due to government intervention, are capping their increases, land valuations (and in some circumstances rates charges) are increasing so this is still compounding higher. Tenants are usually reluctant to enter into a Gross Lease paying the full rent and outgoings total being asked, they try to negotiate. There are circumstances where Gross Leases can be favourable almost regardless of outgoings increases and this occurs when higher annual rent increases are involved or if you have negotiated a higher starting rent.
If you are in the lucky position of being able to claim Land Tax from the Tenant, this may change your strategy yet again.
Contact us to discuss your circumstance and how we can assist you in making the right choice, Gross or Net Lease?