Who Pays The Fees?

So far, we have reviewed BWOFs and commercial property insurance. The next step in ensuring you have a healthy commercial property is understanding who is responsible for the fees. Commercial property fees are an obligation – but whose obligation are they? While something like rent is obviously the tenant's responsibility, the conversation becomes more complicated when you start to consider things like council rates, legal fees, and building repairs. Several different factors can determine who is liable to pay these fees.

‍The type of lease

‍Different types of leases come with different conditions. It's important that both the landlord and the tenant clearly understand the type of lease to avoid any delay or confusion of the payments owed. With net leases, the tenant is obligated to not only pay the base rent they also are responsible for the outgoings. Outgoings in this situation are normally charged directly to the tenant, as per the lease. Outgoings are expenses related to the property, like land tax, council rates, water rates, insurance, or if the property is a unit in a Body Corporate. In this case, who pays the levies is should also be considered. Gross leases are different. In this lease, the tenant is only responsible for the rent and outgoing costs. However, outgoing costs can sometimes be included and can only be charged as one payment. There are numerous benefits from having a Gross Lease for a tenant. However, from a landlord's perspective, additional administration is required for this type of lease as an OPEX budget would need to be managed. An OPEX budget should be washed up every year and tenants informed of the status of the budget. Any under recovery from the tenant or over recovery would need to be addressed with the tenants. While most tenants of commercial properties pay the outgoings, these fees can be negotiated with the landlord.

‍What's in an outgoing clause?

‍Whether you have a net or gross lease, the outgoing expenses should be clearly defined for both parties. The outgoings clauses of the Deed of Lease or Agreement to Lease will detail the fees that the tenant is responsible for. In addition to expenses related to the property, like land and council tax, outgoing clauses may also include maintenance and repair fees. Maintenance and repair fees are typically passed on to the tenant, or the tenant may be required to reimburse the landlord for such repairs. This may vary depending on the edition of the lease. There are limits to what costs a landlord can pass on to a tenant, like recovering costs from structural repairs to the premises or even extensive repairs to the roof classes as capital expenses. Landlords may also be restricted to legal expenses related to the preparation of the lease, but again, that will depend on the version of their lease.

‍The version of the lease documentation

‍After negotiating the terms of the Agreement to Lease, which includes the rental and outgoings, landlords and tenants will enter into a Deed of Lease. The standard lease agreement and Deed of Lease documentation are governed by the Auckland District Law Society. This will set out the main terms, including the length term of the lease, renewal options for the lease term, rent payments, rent reviews, and outgoings. Once signed, this is a legally binding contract for both tenant and landlord. There are two main editions of the ADLS lease agreement, and while any new contracts should use the most recent (the 6^th), some properties may still be on an older versions (such as the 5^th edition).There are subtle differences between the editions of the ADLS lease documentation, such as in the 5^th edition, tenants are required to pay the legal costs associated with preparing the deed of lease. However, the 6^th edition states that each party is responsible for their own legal fees. Under the 6^th edition, tenants are responsible for all repairs and maintenance, except any works classed as capital works. Examples of capital works are replacing the roof or replacing an obsolete lift. The percentage of the outgoings that the tenant is obligated to pay also depends on the version of the agreement. If it's the 5^th, then the percentage doesn't necessarily have to be "fair." However, this has been altered slightly in the 6^th, which requires landlords to adjust outgoing percentages to be "fair."

‍Property managers

‍The type of lease, the details of the outgoing clause, and the lease agreement's edition can all make renting a commercial property an incredibly complex and confusing process. Having a property manager means having an experienced professional take care of all the uncertainties and complications, ensuring the protection of your investment. Best of all, commercial property owners won't need to worry about property management fees as in most cases the management fees are able to be recovered to the tenant. The team at Azure has a wealth of knowledge and experience when it comes to managing commercial properties. Get in touch with us to discuss how we can look after your property.