Gross Rental Versus Net Rental Explained: What Every Commercial Property Tenant Should Know

Gross rental is the monthly rental charged by a landlord for the use of a commercial property. It is usually quoted as an amount per square metre, per month, excluding VAT.

For example, if an office measures 200 m² and the gross rental is R180/m², the monthly rent is:

The important point is that gross rental is not always the final amount you will pay. It is simply the base rental, with certain operating costs included and others excluded.

Unfortunately, there is no single national standard. Different landlords include different items, so tenants should always ask for a detailed breakdown before signing a lease.

In most commercial properties, gross rental includes the landlord's normal property operating expenses. These typically include:

• • Municipal rates and taxes
• • CID levies
• • Body corporate levies
• • Building insurance
• • Common area cleaning
• • Security of the building
• • Maintenance of shared areas such as foyers, passages and gardens
• • Management and administration of the property

These are costs the landlord incurs to own and operate the building and are generally recovered through the gross rental.

For example, if you rent an office in a multi-tenanted building, you benefit from cleaned reception areas, maintained lifts, security guards and landscaped gardens. Those costs are normally built into the gross rental rather than billed separately.

This is where tenants often get caught out. Several expenses may be charged in addition to the gross rental. Common exclusions include:

• • VAT (where applicable)
• • Electricity
• • Water consumption
• • Sewerage charges
• • Refuse removal
• • Internet and telephone services
• • Parking bays (if charged separately)
• • Air-conditioning electricity after hours
• • Diesel charges for generator usage during load shedding

These items vary from building to building, but they can materially increase the monthly cost.

As an example, a tenant paying R36,000 gross rental may also receive monthly bills for electricity of R7,500, water of R1,200, parking of R2,000 and generator recovery of R800. The actual monthly occupancy cost becomes R47,500, before VAT.

That is why the advertised rental is only part of the picture.

Imagine two similar 200 m² office buildings.

At first glance, Building B appears to be the bargain because its rental is R15/m² lower. However, once the additional monthly charges are included, it actually costs R5,000 more per month to occupy.

This is why experienced tenants compare the total cost of occupancy, not just the advertised rental. A lower rental does not necessarily mean a lower monthly cost, and understanding the full picture can save a business a substantial amount over the life of a lease.

The total cost of occupancy is the complete monthly amount your business pays to occupy the premises. It includes every recurring property expense.

A simple calculation looks like this:

This is the number that should be compared with other properties because it reflects the real cost of doing business from that location.

Before signing a lease, tenants should ask the landlord or broker a few simple questions.

• • Does the rental include municipal rates?
• • Are operating costs included?
• • How is electricity measured?
• • Is water separately metered?
• • Are parking bays included?
• • Is the rental inclusive or exclusive of VAT?
• • Are there generator or backup power charges?
• • What annual rental escalation applies?

These questions often reveal costs that are not obvious in the marketing brochure.

You may also hear the term net rental.

A net rental is lower because it excludes many of the landlord's operating costs. The tenant pays the base rental plus additional recoveries for rates, levies, insurance, security, maintenance, and so on. For example:

Neither structure is necessarily better. Gross leases are usually simpler because budgeting is easier, while net leases provide greater transparency by showing each expense separately.

The key is understanding which model is being offered.

Commercial leases usually include an annual escalation. Utility costs may also rise independently as municipal tariffs increase.

For example, a tenant paying a gross rental of R47,500 per month today with an annual escalation of 8% would pay R51,300 after the first year's escalation, even before increases in electricity and water tariffs.

When preparing a business budget, it is sensible to allow for both rental escalation and rising utility costs rather than assuming expenses will remain constant.

Gross rental is an important starting point, but it should never be the only number considered. The real question is: what will this property cost my business every month?

By understanding what is included, identifying what is excluded, and calculating the total cost of occupancy, tenants can make informed decisions and avoid unexpected expenses. A property with a slightly higher gross rental may ultimately prove better value if it includes more services and results in a lower overall monthly cost.