When an investor buys a tenanted commercial property, the headline number on the marketing flyer is the passing rent. The number that actually lands in the bank account, year after year, is the net rent — the rent left over once the property's running costs have been paid. The gap between those two figures is outgoings, and how a lease allocates them is one of the most consequential, and most under-read, parts of any commercial transaction.
Outgoings are the recurring costs of owning and operating real estate: council and water rates, land tax, building insurance, owners corporation or body corporate levies, property management, repairs and maintenance, and a long tail of statutory charges. In a well-structured net lease the tenant reimburses most of these. In a gross lease the landlord absorbs them. The difference does not change the building — it changes the yield, and it changes who carries the risk when a rates bill or an insurance premium jumps.
For a buyer, outgoings are where an attractive-looking return can quietly erode. A property advertised on a 6 per cent yield can deliver materially less if a slice of the outgoings turns out to be non-recoverable, if the land tax was calculated on a favourable single-holding basis, or if the tenant has a legitimate argument that a recovered cost was really capital expenditure. Reading the outgoings correctly is the difference between buying the yield you were shown and buying the yield you actually get.
The rent tells you what the property earns. The outgoings clause tells you what you keep. A net yield is only as reliable as the recovery mechanism behind it.
What outgoings actually cover
"Outgoings" is a defined term in most commercial leases, and the definition matters more than the label. A typical schedule of recoverable outgoings includes the following, though the exact list is whatever the lease says it is.
- Council (municipal) rates — the local government charge on the property.
- Water and sewerage rates — fixed service charges, and sometimes usage where separately metered.
- Land tax — the state revenue charge on the unimproved land value, and the single most contested outgoing because of how it is assessed and whether it can be passed on at all.
- Building insurance — the premium for insuring the structure, plus public liability and often loss-of-rent cover.
- Owners corporation or body corporate levies — where the property is strata-titled, the administrative and sinking-fund contributions. These are explored in the body corporate and strata fees guide.
- Property management fees — the cost of managing the tenancy and the building.
- Repairs, maintenance and servicing — lifts, air-conditioning, fire systems, common-area cleaning and the like.
- Statutory and compliance charges — fire-services levies, essential-safety-measure inspections, pest control and other regulated items.
Two costs sit deliberately outside this list in most leases: the landlord's own income tax, and capital expenditure. Where they end up — recovered, shared, or worn entirely by the owner — is the substance of the negotiation, not a footnote.
1 Gross, net and semi-gross: who bears the cost
Every commercial lease sits somewhere on a spectrum defined by how outgoings are allocated. The three reference points are gross, net and semi-gross, and the structure drives both the quoted yield and the volatility of the income. The broader mechanics of each form are covered in the guide to commercial lease types.
Gross lease
The tenant pays a single rent and the landlord pays the outgoings out of it. The tenant has cost certainty; the landlord carries the risk that rates, insurance or land tax rise faster than the rent reviews. Gross leases are common in office and in smaller retail, and they mean the advertised rent overstates the true net return — the buyer must deduct the full outgoings load to find the real yield.
Net lease
The tenant pays rent plus the recoverable outgoings, so the landlord's income is insulated from cost inflation. Most freestanding commercial, industrial and large-format retail trades on a net basis. The strongest version is the triple net structure, where the tenant carries rates, insurance and maintenance and the landlord's return is close to a clean pass-through — the subject of the triple net lease guide.
Semi-gross lease
A hybrid. The landlord pays outgoings up to a fixed base year amount, and the tenant pays only the increases above that base in later years. Semi-gross leases are widespread in office. The trap for a buyer is the base year itself: if it was struck several years ago, the landlord may already be absorbing a meaningful gap between the frozen base and current actual costs, and that gap compounds until the next lease.
| Lease structure | Who pays outgoings | Income volatility for the landlord | Typical use |
|---|---|---|---|
| Gross | Landlord (from the rent) | High — cost inflation erodes net income | Office, smaller retail |
| Semi-gross | Landlord to base year; tenant pays increases | Moderate — base-year gap is the risk | Office |
| Net | Tenant (recoverable items) | Low — costs largely pass through | Industrial, freestanding retail |
| Triple net | Tenant (rates, insurance, maintenance) | Very low — near clean pass-through | Net-lease investment assets |
2 Recoverable versus non-recoverable
The phrase "net lease" promises that outgoings are recovered. It rarely means all of them are. A lease defines which costs are recoverable, and anything outside that definition is worn by the owner regardless of how the deal was marketed. The most common non-recoverable items are:
- Capital expenditure — replacing a roof, an air-conditioning plant or a lift is usually the landlord's cost, not a recoverable outgoing, even though the tenant pays to service and maintain the same equipment.
- The landlord's own costs of ownership — income tax, financing costs, and the expense of selling or refinancing.
- Costs attributable to vacant tenancies — in a multi-tenant building, outgoings on empty space generally fall back to the owner.
- Statutorily excluded items — under the various state retail leases Acts, certain outgoings simply cannot be passed to a retail tenant, the most notable being land tax in several jurisdictions.
For the buyer, the work is to reconcile the marketed net yield against the lease definition. If the agent quotes outgoings of, say, a given figure per square metre but the lease excludes management and capital items, the genuine recoverable figure is lower and the owner's real cost is higher. This is exactly the kind of gap that disciplined tenant and lease due diligence exists to surface before exchange.
3 The land tax problem
Land tax deserves its own section because it is the outgoing most likely to be wrong on a flyer and most likely to be disputed in a lease. State and territory revenue offices assess land tax on the unimproved value of the land, with thresholds, rates and surcharges that differ in every jurisdiction and move with each budget. The detail is set out in the state-by-state land tax guide.
The single-holding basis
The decisive concept for a buyer is how the recoverable amount is calculated. Land tax in most states is progressive: an owner who holds many properties is assessed at a higher marginal rate across an aggregated land value. A lease that allows recovery on a single-holding basis means the tenant pays only the land tax that would apply if the property were the owner's only holding — almost always less than the owner's actual aggregated bill. The owner absorbs the difference.
This is why a vendor's quoted "land tax recovered" figure can be honest and still misleading. If the vendor is a small holder near a threshold, the single-holding figure may be modest; if you, the buyer, will hold the property inside a larger aggregated portfolio, your actual land tax could be far higher than what the lease lets you recover. The recovery clause does not change because you bought the asset — you inherit the lease's single-holding limit and wear the gap yourself.
Retail-lease prohibitions
Several states go further and prohibit land-tax recovery from retail tenants entirely under their retail leases legislation — Victoria and South Australia are well-known examples, and the position differs again in New South Wales, Queensland and elsewhere. A lease clause that purports to recover land tax may be unenforceable if the tenancy is "retail" under the relevant Act, which means the buyer must confirm both the lease wording and whether the statute overrides it. Treat any land tax line in a retail outgoings recovery with particular suspicion.
4 Multi-tenant apportionment
In a single-tenant building the outgoings question is binary: the tenant pays them or it does not. In a multi-tenant property — a strip of shops, a small office building, an industrial estate — the costs must be apportioned between tenancies, and the method is a frequent source of dispute.
- Lettable area — the most common basis. Each tenant pays a proportion equal to its share of the building's total lettable area. Clean in principle, but it relies on the area schedule being accurate and on vacant space being carried by the owner.
- Fair and reasonable — some costs (a tenant-specific service, after-hours air-conditioning) are allocated to the tenant that causes them rather than spread by area.
- Specified percentages — fixed shares written into each lease, which can drift out of line with reality as tenancies are reconfigured.
The buyer's job is to add up the apportionment across all leases and confirm the recovered total does not exceed the actual outgoings — over-recovery is unlawful in retail tenancies and commercially fraught everywhere — and, just as importantly, to check how much sits on vacant space the owner is funding. Sound commercial property management keeps these schedules current; weak management is where apportionment errors and recovery leakage accumulate.
5 Estimates, reconciliations and capital disputes
Estimates and the annual reconciliation
Outgoings are usually recovered in advance against a budget estimate, then trued up after year end against actual expenditure in a reconciliation. Retail leases legislation in most states mandates the provision of an annual outgoings estimate and a reconciliation statement, and failure to provide them can suspend the tenant's obligation to pay. A buyer should ask for the last two or three reconciliations: they reveal whether recovery has been running ahead of or behind cost, whether the tenant has been disputing items, and whether any credits or shortfalls will carry into the new ownership.
Capital versus operating expense
The most expensive outgoings argument is whether a cost is capital (the owner's) or operating (potentially recoverable). Repairing an air-conditioning unit is maintenance; replacing the entire plant is capital. The line is genuinely contestable, leases define it inconsistently, and a tenant facing a large "maintenance" charge has every incentive to call it capital. For the owner this matters twice over: a recovered operating cost preserves net income, while a capital item not only falls on the owner but is also depreciated rather than expensed, with consequences best confirmed with an accountant. The classification a vendor has been applying may not survive scrutiny by a new tenant or a new managing agent.
6 What buyers must verify before exchange
Outgoings are a due-diligence discipline, not a marketing line to be accepted at face value. The most reliable approach is to rebuild the net yield from the lease and the source documents rather than from the information memorandum. A working checklist:
- Read the outgoings definition in the lease, not the summary in the marketing. Confirm exactly which items are recoverable and which are excluded.
- Identify the lease structure — gross, semi-gross, net or triple net — and, for semi-gross, find the base year and quantify the gap to current actuals.
- Test the land tax line: confirm whether it is recovered, on what basis (single-holding or otherwise), and whether the tenancy is "retail" under state law such that recovery is prohibited.
- Obtain the last two or three reconciliations and compare recovered amounts to actual costs and to the marketed figures.
- For multi-tenant assets, sum the apportionment, check for over-recovery, and quantify outgoings on vacant space.
- Separate capital from operating and form a view on looming capital items — roof, plant, compliance upgrades — that the lease will not let you recover.
- Rebuild the net yield from these inputs and compare it to the quoted figure. The gap, if any, is your real finding.
This work feeds directly into the wider commercial due-diligence process and into how the asset is priced. A property where outgoings are fully recovered on a net basis with a strong covenant deserves a tighter yield than one where the owner quietly funds a slab of non-recoverable cost — and the way those returns are measured is set out in the explainer on cap rate, gross yield and net yield. Outgoings are not administrative detail. They are the bridge between the rent a property advertises and the income an owner actually keeps.
Frequently Asked Questions
What is the difference between a gross and a net commercial lease?
In a gross lease the tenant pays one rent and the landlord pays the outgoings from it, so the landlord carries the risk of rising costs. In a net lease the tenant pays rent plus the recoverable outgoings, insulating the landlord's income from cost inflation. The same property will quote a higher headline rent on a gross basis and a lower one on a net basis, so a buyer must know which structure applies before comparing yields.
Can a landlord recover land tax from a commercial tenant?
It depends on the lease and the state. Many commercial leases allow land tax recovery on a single-holding basis, meaning the tenant pays only the tax that would apply if the property were the owner's only holding, which is usually less than the owner's actual aggregated bill. Several states, however, prohibit recovering land tax from retail tenants entirely under their retail leases legislation, so the clause and the statute must both be checked.
What does an outgoings reconciliation do?
Outgoings are typically collected in advance against a budget estimate and then trued up after year end against the actual costs incurred, which is the reconciliation. It produces a credit to the tenant if recovery ran ahead of cost, or a further charge if it fell short. Reviewing the last few reconciliations shows a buyer whether recovery has been accurate and whether any disputes or adjustments will carry into the new ownership.
Why do outgoings matter so much to a property's yield?
The advertised yield is usually based on passing rent, but the income an owner actually keeps is the net rent after non-recoverable outgoings. If part of the outgoings cannot be passed to the tenant — capital items, vacant-space costs, statutorily excluded charges — the true net yield is lower than the quoted figure. Verifying recovery against the lease is the only way to confirm you are buying the return you were shown.