Home / Insights / Understanding Retail Lease Outgoings: Key Considerations for Retailers and Landlords Understanding Retail Lease Outgoings: Key Considerations for Retailers and Landlords October 10, 2024 - Retail Leasing Trends, Shopping Centre Analysis Outgoings, or recoverable operating expenses, are not just another aspect of retail leases. They are crucial to managing costs in retail leases. These expenses cover maintaining and operating a retail property, including property taxes, council rates, water, insurance, management fees, and other essential services. For city-based retail centres, outgoings can represent as much as 25% of the total rent, highlighting their significant impact on overall occupancy costs. A clear understanding of these costs is vital for both retailers and landlords. This knowledge not only empowers retail tenants to budget their occupancy expenses accurately but also gives landlords the tools to maximise the financial performance of their properties while ensuring transparency and fairness in their dealings. It’s this understanding that truly empowers both parties in their lease negotiations. The role of outgoings in retail leases In retail leases, outgoings significantly influence the overall space cost. Landlords typically pass these expenses on to tenants in addition to their base rent. How outgoings are structured can vary depending on the lease agreement, making it essential for retailers and landlords to understand the break down of these costs. This understanding empowers both parties in their lease negotiations. Outgoings must be budgeted every year and reconciled against actual expenses, with either a refund or an additional charge applied to the tenant at the end of the financial year. For larger retail centres, these outgoings are usually audited to ensure accuracy and compliance, providing a high level of transparency that benefits both retailers and landlords and reassures them of the fairness of the process. Capital costs and the Retail Leases Act It’s important to note that capital costs are not recoverable from tenants under the Retail Leases Act. Capital costs refer to expenses related to improving, replacing, or upgrading the property’s structure or facilities that increase its value or extend its useful life. Landlords are responsible for these costs and cannot pass them on to retailers as part of the outgoings. This regulation ensures that landlords do not burden retailers with expenses that contribute to the long-term enhancement of their assets. The shift to semi-gross leases in retail shopping centres There has been a noticeable shift towards semi-gross leases in retail, particularly shopping centres. Under these agreements, landlords bundle controllable expenses into the base rent, such as management fees, security, and repairs and maintenance. However, statutory outgoings like property taxes and insurance remain separate charges, still recovered from tenants. This shift to semi-gross leases was driven by the trend of rent increases outpacing the cost of delivering these services, allowing landlords to create a form of “profit rent.” By including these controllable expenses in the rent, landlords generate additional income from the difference between the rent charged and the actual cost of services provided. Challenges in comparing retail lease structures Adopting semi-gross leases by landlords has added complexity to comparing lease terms across retail shopping centres. While many landlords operate on traditional net leases, where each outgoing is itemised and charged separately to tenants, semi-gross leases still consolidate many of these costs into the rent. The variation in outgoing costs can be significant, with semi-gross outgoings ranging from $20 to $60 per square metre, depending on the shopping centre and the services included. In contrast, net outgoings for regional shopping centres and larger retail properties often exceed $200 per square metre. This difference highlights the importance of closely examining the lease details to understand the actual cost of retail space occupancy. Conclusion A recent study found that the average net outgoings per square metre for regional and city centre-based shopping centres in New South Wales (NSW) and Queensland (QLD) were around $240/m². In contrast, the average cost for semi-gross leases was significantly lower, at approximately $60/m². This indicates that, on average, landlords embed 75% of the outgoing costs in the rent for semi-gross leases. These findings emphasise the need for retailers and landlords to clearly understand retail lease outgoings, supported by accurate benchmarks to gauge competitive pricing in the marketplace. With the growing trend towards semi-gross leases in shopping centres, all parties must be aware of how these costs impact the overall occupancy expenses and the financial performance of their retail spaces. Understanding that capital costs are not recoverable under the Retail Leases Act further underscores the importance of transparency in lease agreements, ensuring that tenants are only responsible for fair and reasonable expenses. Access to detailed information and expert guidance can help landlords and retailers navigate the complexities of lease agreements, leading to more informed financial decision-making in retail property management.