Marianna Idas, Principal at eLease Lawyers, describes what to look out for with outgoings in retail leases.
Don’t overpay for outgoings under your retail lease. It is important to understand what the landlord is charging and if they can charge these costs.
Just because a lease states a tenant must pay for certain outgoings does not mean the landlord can claim these costs. Each state has legislation in place to protect the retail tenant including what outgoings the tenant can be requested to pay and which are prohibited.
Outgoings can include:
- Expenses attributable to the management, operation, maintenance or repair of the retail shop building or land.
- Charges, premiums, levies and rates or taxes payable by the landlord.
- Fees charged by a landlord for services provided by the landlord in connection with the management, operation, maintenance or repair of the retail shop building or land.
- GST paid by the landlord.
In most states, a tenant is not required to pay for the following items:
- Contribute to outgoings not specifically referrable to the shop. That is, the shop must receive a benefit resulting from the outgoing.
- Cost of any finishes, fixtures, fittings, equipment or services in or for the shop unless the tenant’s requirement to contribute was disclosed in the landlord’s disclosure statement.
- Capital expenditure.
- Interest and charges incurred by a landlord on borrowings.
- Rent and other costs associated with land not used by or for the benefit of the shopping centre.
- Land tax (variable depending on the state).
- Management fees (variable depending on the state).
- Contributions to a depreciation or sinking fund.
- Insurance premiums for loss of profits.
- Excess payments in relation to a claim on the landlord’s insurance policy for the centre or building.
- Payment of interest and charges on amounts borrowed by the landlord.
- Landlord’s contributions to merchants’ associations and centre promotion funds.
What should the lease state about outgoings?
The lease should specify the following:
- What outgoings are payable.
- How the outgoings will be determined.
- The apportionment to the tenant; and
- How the outgoings may be recovered.
How is the proportion of outgoings determined?
The proportion of outgoings payable by a tenant is determined based on the tenants who enjoy or share the benefit resulting from the outgoing.
Estimate and statement of outgoings
The requirement for each state varies but, in most cases, the landlord must provide the tenant with the following:
1. A disclosure statement before the lease is entered into which specifies the outgoings payable.
2. They must also give the tenant an annual estimate of the outgoings.
In most cases, the written outgoings statement must be accompanied by a report prepared by a registered company auditor confirming whether the statement correctly states the landlord’s expenditure and whether or not the total amount of estimated outgoings exceeded the total actual outgoings.
Adjustment of outgoings
An adjustment for outgoings must be made within a specified period (which varies in each state) after an outgoings statement is issued to the tenant. That is, the tenant pays for the gap, or the tenant is reimbursed for overpaid outgoings.
Promotion and advertising outgoings
This can only be charged if the landlord makes available to the tenant its marketing plan and shows where the costs have been spent. In conclusion, it is advisable for tenants to have a lawyer specialising in retail leases review their lease so that they can be informed of what outgoings are payable and which are prohibited so that they avoid paying more than they should.
This article originally appeared in the Feb/Mar issue of Convenience & Impulse Retailing magazine.