If you are entering into a retail or commercial lease, you should be aware of the additional costs other than rent, such as outgoings. The term outgoings refers to the running cost of both the premises and the building it forms a part of. Below we have outlined the common issues that can arise between parties as well as three practical tips to help you avoid leasing disputes over outgoing matters.
What are Outgoings?
Outgoings are considered the running cost of the building from which the tenant benefits. The tenant must reimburse the landlord proportionately (usually determined by the net lettable area of the premises against the net lettable area of the building). Outgoings includes:
- Electricity and rates that are not separately metered;
- The running cost of the building such as air conditioning and lift services;
- Management costs;
- Maintenance and repair costs of the building;
- Insurance premiums; and
- Land tax.
Retail lease legislation (which are state specific) regulate what items are recoverable as outgoings. A non-retail premises lease, however, will require careful review as the lease is unregulated and the terms are purely contractual between the parties. As a rule of thumb, the landlord cannot recover any costs that it has not rightly incurred. That means that the landlord cannot make a profit from outgoings but can only pass on these costs to the tenant.
Tip 1: Clearly State Recoverable Outgoings in the Lease
It is not always the case that a lease document itemises the calculation of outgoings. Consequently, disputes often arise from lease documents that contain a general outgoings recovery provision.
In Marcinko & Boceanu and Ors [2001] ACAT 34, the matter before the Tribunal was whether the wording of the outgoings provision could be construed to mean that the tenant has to pay for the cleaning of the grease trap. In this matter, the landlord called upon the tenant’s bank guarantee on the basis that the tenant had failed to clean the grease traps that were located not on the premises, but the common area.
The landlord relied on a clause that provided the tenant would be responsible for any disposal service or utility the local authority provided “to the Premises”.
The Tribunal interpreted the clause not to require the tenant to clean the grease trap as it applied “to the Premises”. Since the grease trap was located in the common area, that cleaning obligation fell outside the scope of the recoverable outgoings provision. Also, the disclosure statement which requires the landlord to itemise the outgoings payable did not refer to the costs of cleaning the grease trap.
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Tip 2: Check the Landlord’s Outgoings Record Keeping Process
The landlord may recover outgoings as they fall due or paid in advance on a monthly basis. The landlord has an obligation to provide an outgoings audit report at the end of each lease year to show the actual amount of outgoings incurred. Any discrepancy with the tenant’s payment of the estimate of outgoings throughout the year will be adjusted based on this report.
Tenants here rely on the landlord’s record keeping. Non-retail premises should ensure that the process is clearly set out including:
- When the landlord must provide its outgoings statements;
- The procedure for any reconciliation of discrepancy; and
- How any overpayment is reimbursed or applied to the next lease year’s outgoings payment.
For retail leases, state-based retail legislation regulates this process.
Tip 3: Include Provisions Which Cap Strata Levy Fees
It is not uncommon to find lease premises owned under a strata scheme. The maintenance of the building’s common areas which the premises forms part of are owned and managed by the Owner’s Corporation.
What this means is that the Owner’s Corporation will have strata levies and sinking funds in place to deal with the cost of maintaining and managing the building and these costs are more often passed on directly to the tenant.
The point of contention is whether the costs of repairs and maintenance categorised as part of the sinking fund are recoverable as outgoings. For retail lease premises, the retail legislation specifically excludes capital and structural repairs from being a recoverable outgoing. For non-retail leases, this may not always be the case. Tenants should take care when reviewing the terms to consider the scope of outgoings.
To limit the extent of liability, tenants may want to consider negotiating a provision which caps the amount of sinking fund payable at a certain percentage. This provision will protect you from paying for any increases over that threshold and the landlord shares in the cost of any excessive increase.
Key Takeaways
The payment of outgoings represents a significant cost under a lease second to rent. Before entering into a lease, ensure you review the payment obligations as they could represent a significant cost. The wording of outgoings should be precise, and both parties should be clear on their obligations.
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If you would like assistance in reviewing your lease documents, negotiating your lease, or advice concerning your lease terms, get in touch with our experienced leasing team on 1300 544 755.
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