What are you really paying for? Commercial and retail leases – know your outgoings
In a lease for commercial or retail premises, rent is only one part of the tenant’s ongoing financial obligation. Additional costs called “outgoings” are usually passed on to the tenant by the landowner.
What are outgoings?
Outgoings are the landowner’s reasonable expenses associated with the premises, and they can pass these on to the tenant if properly documented in the lease.
Commonly, outgoings include:
- Taxes, charges and fees such as council rates, body corporate levies and audit fees;
- Day to day premises costs paid by the landowner, such as:
– garbage collection
– security services
– fire protection equipment
- Maintenance and repair services, paid by the landowner and not for fair wear and tear (eg air-con servicing); and
- Marketing and advertising services for a shopping centre.
What outgoings can a landowner recoup?
Most retail and commercial leases in the ACT are governed by the Leases (Commercial and Retail) Act 2001 (ACT) (“the Leases Act”). Section 71 of the Leases Act only allows outgoings to be recouped by a landowner if the following three points are satisfied:
- The outgoings were disclosed in the disclosure statement;
- The outgoings are recoverable outgoings; and
- The lease sets out:
- The outgoings that may have been recovered by the landowner;
- How the amount of outgoings will be calculated and apportioned – eg. outgoings can be shared between landowner and tenant, or between multiple tenants of one building; and
- How the tenant is required to pay the outgoings – eg. reimbursements to the landowner once outgoings are paid? or periodic payments during the lease based on estimated outgoings?
What are recoverable outgoings?
Section 70 of the Leases Act says that a landowner can only recover:
- Reasonable expenses directly related to the operation, repair or maintenance of the premises or building;
- Rates, levies, taxes or statutory charges payable by the landowner; and
- Reasonable expenses incurred in promoting a retail premise in a centre.
What other provisions must be included in the lease if the tenant is liable for outgoings?
A lease that provides for the tenant to pay outgoings must include provisions requiring the landowner to:
- Give estimates of future outgoings to the tenant at particular intervals in the lease (usually the beginning of each financial year); and
- Account to the tenant at the end of the interval for the actual expenditure compared to the estimate; and
- Adjust if necessary between the landowner and tenant for the difference between:
– what the tenant has paid based on the estimates, and
– what was actually expended by the landowner.
What happens if there are multiple leases within one premises (i.e. a retail premises in a shopping complex)?
If there is more than one lease within a particular property, the outgoings are generally apportioned on the basis of the lettable area that premises bears to the total area of the property.
However, this is not required by law, and the Lease itself must establish how outgoings will be calculated and apportioned.
What should you do before entering a Lease?
As a Landowner you must ensure:
- All outgoings you wish to collect from the tenant are clearly and specifically disclosed in the Lease and Disclosure Statement.
- The Lease contains all the provisions mandated by the Leases (Commercial and Retail) Act 2001.
Failure to do either of these things can result in time-consuming and costly disputes between yourself and the tenant and may prevent you from recovering your expenses relating to the premises.
As a tenant, make sure you:
- Read and understand the Lease and Disclosure Statement. These documents will record what outgoings you have to pay. Make sure you are certain which outgoings you are liable for, in what proportion and when you must make any payments.
- If your lease is one of several for a particular building, make sure the outgoings are fairly apportioned in the lease by reference to the lettable area of your premises.
If you need assistance with your commercial lease contact our Property and Commercial Team
Cassandra Emmett – Practice Leader – Property and Commercial
P 02 6215 9100