Outgoing, going, gone – Recovery of outgoing costs in leases
It is common knowledge that commercial rates have increased substantially since the commencement of the Territory’s tax reform in 2012. For many owners, the increase in commercial rates now poses the question of affordability and viability. Whether an existing owner or a potential buyer, it is now essential that the terms of the lease and the information contained in the disclosure statement are scrutinised to determine whether the recovery of outgoing costs is valid.
If you are a landlord of a commercial or retail lease that falls within the parameters of the Leases (Commercial and Retail) Act 2001 (the Act), Part 9 is worth a read.
So what are outgoings? And how can they be recovered?
An outgoing includes:
- an expense directly related to the operation, repair or maintenance of the building that contains the premises or, if located in a retail area of a shopping centre, an area used in connection with the retail area;
- rates, taxes, levies and other statutory charges; and
- for premises located in the retail area of a shopping centre, the cost of promoting the premises or centre.
To be recoverable:
- the nature of the outgoing must be stated in the disclosure statement; and
- the lease must state the outgoings that may be recovered, how the amount is to be calculated or apportioned and how the outgoings may be recovered.
The above seems relatively simple, right? Surprisingly, it is not uncommon for a landlord to fall short of the above requirements and for a dispute to then arise between the parties. To reduce the likelihood of a dispute arising, consider the following tips:
- The nature of the outgoings not being properly stated in the disclosure statement.
Pay particular attention to the type or nature of the outgoing being recovered. For example, the City Centre Marketing and Improvements Levy (applies to commercial properties in the City and some area of Braddon) is a separate charge to general rates. To be recoverable, the Levy should not be lumped under ‘general rates’ but should be specifically stated in the disclosure statement.
- The lease failing to clearly state the outgoings to be recovered.
Though many leases will contain a broad definition of outgoings, it is important to revisit this definition to ensure consistency between the lease and the disclosure statement. If not stated in the lease, the outgoing will not be recoverable.
- The lease failing to clearly state how the amount is to be calculated.
This is particularly important for commercial building that contains a number of tenancies but is not unit titled. In that particular circumstance, care should be given to the proportion payable by each tenant. For instance, where one tenant is liable to pay 100% of the general rates amount and another is liable for increases in the general rates amount over a base year, the landlord will not be able to validly recover the full general rates amount from the first tenant as it will likely have recovered part of the rates from the second tenant. This then leaves the provisions of the lease (for the first tenant) unclear as to what proportion the first tenant remains liable and is open to interpretation.
If you have any queries relating to commercial leasing in the ACT or NSW, please contact our Real Estate Team.