Net Lease vs Gross Lease: Who Pays the Outgoings on a Commercial Property?

What actually sits in each commercial lease structure?

Gross, semi-gross and net leases allocate rent, outgoings and cost-inflation risk differently.

The three structures you will meet in the Australian market, and who carries what:

Are the lease labels and “triple net” descriptions reliable?

No. The clause governs, not the label.

“Triple net” does not mean in Australia what it means in the United States. US usage refers to a defined structure where the tenant carries taxes, insurance and maintenance. In Australia the same asset is more often called a net lease or an outgoings lease, and how far structural and capital items sit with the tenant varies from lease to lease. “NNN” in an Australian listing is a description of intent, not a defined term.

There is no statutory definition of gross or net lease in Australia. A lease described as gross can still pass through specific charges; a lease described as net can carve several out. Outgoings are the cost of running the building, not improving or replacing it. A tenant on a net lease is not funding your new roof — that is your capital expenditure, and it belongs in your holding-cost modelling from the start.

Can a landlord recover land tax from a retail tenant?

It depends on the state, whether the lease is retail, and the wording and limits imposed by legislation.

This is the single biggest variable, and the answer is genuinely state-dependent. For retail leases — the most regulated category — the position across Australia is:

What does “single-holding basis” actually mean?

The tenant contributes only what the property would attract as if it were the landlord’s only land in that state.

Land tax in most Australian states is assessed on the aggregated value of everything a landowner holds in that state, at progressive rates. So a landlord with eight properties pays a far higher land tax bill — and a higher effective rate — than a landlord with one, on the same individual parcel.

Single-holding basis strips that out. The tenant contributes only what the property they occupy would have attracted as if it were the landlord’s only land in that state. The difference is not marginal: on a portfolio well up the progressive scale, the aggregated share of a single property’s land tax can be several times its single-holding figure. The landlord absorbs that gap.

For a buyer, the land tax you will actually pay on a commercial property depends on what else you already own in that state. The vendor’s outgoings schedule shows their position, not yours. That is an accountant question before you commit, not after.

What applies to land tax outside retail leases?

Non-retail commercial leases are largely freedom of contract, but recovery is still limited by the lease and legislation.

Non-retail commercial leases are largely freedom of contract, so land tax is generally recoverable if — and only if — the lease says so. Queensland is the notable trap: recovery under a commercial lease turns on when the lease was entered into, with leases entered into before mid-2009 unable to pass land tax on at all. Even where recovery is permitted by agreement, a well-drafted clause limits the tenant’s share to a single holding.

How much does lease structure change the return?

On identical rent and price, lease structure alone can create a 1.34 percentage-point difference in net yield.

Consider the same suburban commercial building at a purchase price of $1,800,000. Annual outgoings total $24,000: council rates $8,000, water and sewerage $2,500, building insurance $6,000, management fees $4,500 and routine maintenance $3,000.

Listing A is a gross lease at $120,000 per annum. The tenant pays $120,000 all-inclusive and you absorb the $24,000. Net income is $120,000 − $24,000 = $96,000. Net yield is $96,000 ÷ $1,800,000 = 5.33%.

Listing B is a net lease at $120,000 per annum. The tenant pays $120,000 base rent and the $24,000 of outgoings separately. Net income is $120,000. Net yield is $120,000 ÷ $1,800,000 = 6.67%.

Same building, same price, same headline rent — 1.34 percentage points of difference in net yield, created entirely by the lease. At a 6% capitalisation rate, Listing A’s $96,000 supports roughly $1.6 million; Listing B’s $120,000 supports roughly $2.0 million. Four hundred thousand dollars of valuation difference, from a document, not a building.

These are not equivalent deals from the tenant’s side — Listing B’s tenant is outlaying $144,000 all up, against $120,000 for Listing A. In a functioning market a landlord offering a gross lease generally charges a higher headline rent precisely to cover the outgoings they are absorbing. The point is that you cannot compare two listings on headline rent, and a yield quoted off gross rent tells you very little on its own.

Suppose Listing A’s outgoings rise from $24,000 to $30,000. Under the gross lease your net income falls to $90,000 and your yield to 5.0%, with no change in rent and nothing you can do until the next review. Under the net lease, the tenant absorbs it. Over a ten-year term with fixed reviews, that exposure is not trivial.

Which commercial lease structure is better?

Neither in the abstract. The structure must suit the asset, tenant and strategy, and the numbers must reflect it honestly.

A net lease shifts cost and cost-inflation risk to the tenant, which suits an investor who wants income predictability and low involvement. But it raises the tenant’s total occupancy cost, which can make the premises harder to re-let, and it invites more friction at reconciliation time. A gross lease is simpler to administer, often more attractive to tenants in softer markets, and can support a higher headline rent — at the cost of you carrying every increase.

Three questions do most of the work: Is the advertised yield struck on gross or net income? If it is gross, it is not a yield. Which outgoings does the lease actually name as recoverable, and is land tax one of them? If land tax is included in a Victorian, Queensland or South Australian retail lease, that clause may be unenforceable — and the income you are buying is lower than the schedule says. Is capital expenditure properly excluded, and has it been budgeted anywhere? Plant and structure reach the end of their life on their own schedule, not the lease’s.

Where should a commercial buyer go next?

Have the lease reviewed by a solicitor and the land tax and GST position assessed by an accountant before signing anything.

The lease itself goes to a solicitor — for the retail/non-retail classification, for whether the outgoings clauses do what they appear to do, and for the recovery, review and reconciliation mechanics. Land tax, GST and how the structure affects your position as an owner go to your accountant. Neither is a step to compress.

What Kallea sits across is the layer before that: reading the lease as an income instrument rather than a legal document, and checking whether the price being asked is supported by the income that will actually reach you after outgoings. Our commercial buyer’s agency service is in development rather than fully operational, and we would rather say that plainly than imply otherwise.

If you want a picture of your own position before any of those conversations, Kallea’s investment readiness assessment is a practical starting point.