Understanding Variable Outgoings: As Incurred vs Budgeted – What Every Commercial Tenant Needs to Know
If you're a tenant in an office, retail, or industrial property in Australia, chances are you've come across the term "variable outgoings." These are the shared operational expenses of a property, including council rates, insurance, cleaning, repairs, security, and management fees, that landlords typically pass through to tenants under a lease. The costs that landlords can recover from tenants vary between sectors, depending on the type of usage and relevant state legislation, particularly in the retail sector. For example, a Landlord cannot recover management fees from retail tenants in Western Australia.
But how you're charged for these outgoings can vary significantly. Two of the most common methods are:
Charged As Incurred
Charged Based on a Budget
Understanding the difference between these methods is crucial to managing your occupancy costs and avoiding surprise bills. Here's how each approach works, and what you need to look out for.
1. Variable Outgoings Charged As Incurred
Under this approach, you are billed only when the landlord pays for an expense. For example, if the landlord receives a quarterly council rates bill or an annual insurance premium, they will apportion the cost to you based on your lease and invoice you directly after payment has been made.
Pros:
Transparency: You typically receive a copy of the actual invoices, allowing you to know precisely what's being charged.
Cash Flow Accuracy: Your payments align more closely with actual expenditure.
Cons:
Lumpy Cash Flow: Expenses may come in large, irregular chunks, making budgeting more challenging for your business.
Limited Forecasting: You might not know in advance how much to expect or when bills will land.
2. Variable Outgoings Charged on a Budget
In this method, the landlord estimates the total outgoings for the year, based on historical data and expected increases, and charges you in equal monthly instalments. At the end of the budgeted year, the landlord conducts a reconciliation and, where required, an independent audit. If they spent more than budgeted, you may owe the difference; if they spent less, you may receive a credit.
Pros:
Predictable Cash Flow: Monthly amounts are fixed, making budgeting easier.
Less Admin: You aren't constantly receiving ad hoc invoices to review and process.
More Common in Retail & Office: Especially in multi-tenanted buildings and shopping centres.
Cons:
Reconciliation Surprises: You may be asked to pay extra if the landlord underestimated the year's expenses.
Opacity: Unless your lease requires it, you may not receive detailed invoices unless you request them.
What Should Tenants Look Out For in the Lease?
When negotiating or reviewing a lease, pay attention to:
The method of charging: Is it "actuals as incurred" or "budget with annual reconciliation"?
Definitions of outgoings: Ensure clarity on which expenses are recoverable.
Audit rights: Can you request invoices or a breakdown of outgoings?
Timing of reconciliations: When will adjustments be made, and how soon will you be notified?
Cap or limit on increases: Are annual increases restricted by CPI or fixed percentages?
Axiraa's Take
At Axiraa, we advise tenants nationally across all sectors—from single-site industrial operators to multi-site retail brands and national office tenants. We often see tenants surprised by reconciliation adjustments or inconsistent outgoings charges—issues that could have been avoided with explicit upfront negotiation.
Whether you're leasing a warehouse in Perth, a storefront in Melbourne, or a floor in a Brisbane office tower, understanding how your outgoings are charged is essential to protecting your bottom line.
Need help reviewing your lease or negotiating terms? Reach out to Axiraa's tenant advisory team for strategic advice that prioritises your interests.
