One of the biggest advantages of commercial property investment is that many of the costs associated with owning and operating a property can be recovered from the tenant.
However, not every expense can be passed on.
Understanding which costs are typically paid by the tenant and which remain the responsibility of the landlord is essential for protecting cashflow, assessing investment performance, and structuring leases correctly.
If you’re a commercial property owner, investor, or business owner negotiating a lease, here’s what you need to know.
At a Glance: Who Pays What?
| Typically Paid by Tenant | Typically Paid by Landlord |
|---|---|
| Council rates | Leasing commissions |
| Building insurance | Marketing costs |
| Property management fees* | Vacancy costs |
| Common area maintenance | Capital improvements |
| Security services | Major structural works |
| Waste collection | Building upgrades |
| Landscaping and grounds maintenance | Tenant incentives |
*Subject to the terms of the lease.
While this provides a useful guide, the lease ultimately determines who is responsible for each expense.
What Are Commercial Property Outgoings?
Commercial property outgoings are the costs associated with owning, operating, and maintaining a commercial building.
In many New Zealand commercial leases, these costs are recovered from tenants in addition to the rental payment.
Common outgoings include:
- Council rates
- Building insurance
- Property management fees
- Common area maintenance
- Security
- Waste collection
- Landscaping
- Compliance-related costs
The exact recoverable expenses will vary depending on the lease structure.
Costs Typically Paid by the Tenant
Council Rates
Rates are one of the most commonly recovered expenses in commercial property.
Under many lease agreements, tenants reimburse the landlord for all or a portion of the rates applicable to the property they occupy.
Building Insurance
Building insurance is often recoverable as an outgoing.
This helps ensure the property is adequately protected while allocating the cost to those occupying and benefiting from the premises.
Property Management Fees
Professional property management fees are commonly recoverable under commercial leases.
For landlords, this can significantly reduce the cost of professional management while ensuring the property, tenants, lease obligations and maintenance requirements are properly looked after.
Common Area Maintenance
For multi-tenanted properties, tenants generally contribute towards maintaining shared areas such as:
- Car parks
- Accessways
- Shared amenities
- External lighting
- Landscaped areas
These costs are typically allocated based on the proportion of space each tenant occupies.
Security and Operational Services
Security monitoring, access systems, waste collection and other operational services are often treated as recoverable outgoings.
Costs Typically Paid by the Landlord
Leasing Costs
The cost of securing a tenant generally remains the responsibility of the owner.
This may include:
- Leasing commissions
- Marketing campaigns
- Signage
- Advertising expenses
While these costs can be substantial, they are often viewed as part of maintaining occupancy and protecting income.
Vacancy Costs
Vacancy is one of the most expensive costs a landlord can face.
When a property is empty, there is no tenant contributing towards rates, insurance, maintenance or operating expenses.
At the same time, rental income stops.
This is why proactive leasing and tenant retention strategies are so important for long-term asset performance.
Capital Improvements
Major works designed to improve the property’s long-term value are generally paid for by the landlord.
Examples include:
- Building extensions
- Major refurbishments
- Structural upgrades
- New building systems
Unlike maintenance, these improvements are intended to enhance the asset rather than simply maintain it.
Major Structural Repairs
While lease wording varies, significant structural repairs typically remain the responsibility of the property owner.
Examples may include:
- Roof replacement
- Structural remediation
- Foundation repairs
- Seismic strengthening works
Why Lease Structure Matters
Not all commercial leases are structured the same way.
The lease determines how costs are allocated between landlord and tenant.
Gross Lease
Under a gross lease, the tenant pays a single rental amount and the landlord absorbs most operating expenses.
Net Lease
Under a net lease, the tenant pays rent plus a share of the property’s outgoings.
This is one of the most common lease structures in New Zealand commercial property.
Triple Net Lease
A triple net lease requires the tenant to cover most operating expenses associated with the property, creating a more predictable income stream for the landlord.
The Mistake Many Commercial Landlords Make
Many investors focus heavily on the rental figure when assessing a property’s performance.
However, rental income only tells part of the story.
A property leased at a slightly lower rent with strong outgoings recovery can often outperform a property with a higher rental rate where the owner absorbs significant operating expenses.
Over time, increasing rates, insurance premiums, maintenance costs and management expenses can quietly erode returns if they are not appropriately recovered.
Experienced investors look beyond the rent and focus on the net income the property produces.
Final Thoughts
Commercial property investment is about more than collecting rent.
Understanding which costs are recoverable, which remain your responsibility, and how your lease is structured can have a significant impact on your long-term returns.
A well-structured lease helps protect income, improve cashflow certainty and reduce the risk of unexpected expenses.
If you’re reviewing a lease, preparing for a renewal, or considering a commercial property investment, taking the time to understand the cost allocation between landlord and tenant could make a meaningful difference to your property’s performance.
Need a Second Opinion?
Whether you’re reviewing an existing lease, managing a vacant property, or planning your next investment, our team can help you understand how lease structures, outgoings recovery and tenant arrangements may impact your property’s performance.
Get in touch for a confidential discussion about your commercial property.