If you are renting out retail or commercial space then you may want to recover some of the costs from the tenant. However, you need to be aware of the requirements because if you don’t comply with them you may be restricted from recovering these costs.

If you are a tenant in commercial or retail premises then it is important to understand the outgoings you are paying.

What are commercial outgoings in a lease?

The term ‘outgoings’ generally has a broad interpretation, being all expenses incurred or payable in respect of, or incidental to, the ownership of property. This means that every expense of the landlord in relation to the premises or incurred in the operation of the property which it seeks to recover from the tenant could be considered an outgoing.

Outgoings do not include a cost incurred directly by the tenant, for example electricity accounts in the tenant’s name or internet connection.

Different methods of recovering commercial lease outgoings

The costs that the landlord chooses to recover from a tenant is a commercial decision. The most common options for the recovery of outgoings are:

(a) a gross lease, which means that the landlord makes an allowance for outgoings in rent without charging outgoings as an extra liability. This is the most simple option as the landlord is not required to provide any additional information to the tenant or any adjustment of the amount paid by the tenant. However, it also exposes a landlord to the risk that the outgoings will increase during the term above the amount allowed for in the rent payment.
(b) a semi-gross lease, which means that the landlord recovers outgoings from the tenant but limits them for example to rates, taxes and insurance; or
(c) a net lease, which means that the tenant is required to contribute to a full range of outgoings including managements fees, gardening, and the costs of cleaning common areas. A net lease usually provides the greatest financial reimbursement for a landlord but also has the most onerous accounting and audit requirements.

There is also a common practice in the ACT to recover the increases in commercial lease outgoings over a base financial year. For example, a landlord may agree on a rent for the Premises based on the outgoings it is paying for the financial year ending 30 June 2023. A landlord can do this for a semi-gross lease or a net lease.

Check if the Leases Act applies

If the relevant Leases Act applies this will put some limits on what expenses can be recovered by the landlord and also dictates the process which must be followed to recover outgoings.

In NSW the relevant Act is the Retail Leases Act 1994 (NSW) (the RLA). The definition of outgoings is in section 3A of the RLA.

In the ACT the relevant Act is the Leases (Commercial and Retail) Act 2001 (ACT) (the LCRA). Commercial lease outgoings are not defined in the LCRA.

Disclosure statements and estimates

NSW

Section 11 of the RLA requires the landlord to provide the tenant with a disclosure statement. The disclosure statement must include an estimate of the outgoings payable by the tenant and section 12A provides that a tenant is not liable to pay any outgoings which were not disclosed in the disclosure statement. Also, if the disclosure statement contains an estimate which is less than the actual amount of the outgoing then, unless the landlord had a reasonable basis for the estimate, the tenant is only required to pay the estimated amount.

The landlord is also required to provide estimates each year during the commercial lease agreement. Section 27 of the RLA requires a landlord to give the tenant a written estimate of the outgoings, itemising those outgoings under the item descriptions used in the list of outgoings in the disclosure statement, at least 1 month prior to the accounting period used by the landlord. This is usually 1 month prior to the beginning of the financial year. There are further requirements if the premises is in a shopping centre.

Pursuant to section 28A, if the landlord fails to provide the estimate then provided the tenant has requested the estimate and the landlord has failed to provide it within 10 days, the tenant is entitled to withhold payments of outgoings. Section 28A(2) does require the tenant to pay the withheld payments after the landlord has provided the estimate but the landlord cannot charge interest on the payments.

ACT

Section 30 of the LCRA requires the landlord to provide the tenant with a disclosure statement and section 31(b) of the LCRA requires the disclosure statement to contain a written estimate of the commercial property outgoings for the first accounting period (usually the first financial year). Section 71(a) of the LCRA states that outgoings are only recoverable if the nature of the outgoings was stated in the disclosure statement.

Similarly to NSW, the landlord is also required to provide estimates each year during the commercial lease. Pursuant to section 65(1)(a) of the LCRA, the landlord must provide the tenant a written estimate of the outgoings at least 1 month before the start of each accounting period during the term of the Lease (usually 1 month prior to the financial year).

Reporting Requirements

NSW

Section 28 of the RLA requires a landlord to provide an outgoings statement to the tenant within 3 months after the end of each accounting period. The outgoings statement must include details of all actual expenditure by the landlord for the accounting period and must be accompanied by an auditor’s report prepared by a registered company auditor.

The auditor’s report must include a statement by the auditor as to whether or not the outgoings statement correctly states the expenditure by the landlord during the accounting period and as to whether or not the total amount of estimated outgoings for that period (as shown in the estimate of outgoings given to the tenant) exceeded the total actual expenditure by the landlord in respect of those outgoings during that period.

The outgoings statement need not be accompanied by an auditor’s report if the statement does not relate to any outgoings other than land tax, water, sewerage and drainage rates and charges, local council rates and charges, insurance and strata levies, and it is accompanied by copies of assessments, invoices, receipts or other proof of payment in respect of all expenditure by the landlord.
If the landlord fails to provide the outgoings statement in time, then section 28A of the RLA allows the tenant to withhold outgoings payments, similar to if the estimate is not provided.

ACT

In the ACT, section 65(1)(b) of the LCRA requires a landlord to make a written statement of the outgoings available for examination by the tenant within 1 month after the end of the accounting period. This means that the landlord does not have to provide it to the tenant but does need to make sure it is available.

However, similar to NSW, the landlord is required to provide the tenant with a report within 3 months after the end of the accounting period. The report must be prepared by an auditor and must include a statement by the auditor as to whether or not the outgoings were recoverable outgoings (as defined in the LCRA) and whether or not the total amount paid by the tenant for outgoings during the accounting period was more than the amount spent by the landlord.

The report does not have to be prepared by an auditor or contain a statement by an auditor if the tenant is only required to pay one or more of water, sewerage and drainage rates and charges, other rates and statutory charges, or insurance and the landlord has provided the tenant with copies of receipts. There is also an exclusion for general fund Owners Corporation contributions which are used to pay rates or insurance provided that the landlord provides the tenant with a copy of the minutes of the Owners Corporation which confirms that the contributions have been used for those costs.

Adjustments

In both NSW and ACT, there must be an adjustment at the end of each accounting period between the landlord and the tenant to take account of an underpayment or overpayment by the tenant in relation to the commercial property outgoings. In the ACT, section 67 of the LCRA requires the adjustment to happen within 3 months after the end of each accounting period. In NSW, section 29 of the RLA requires the adjustment to take place either within 1 month after the landlord gives the tenant the outgoings statement or within 4 months after the accounting period, whichever is earlier.

If the tenant is reimbursing the landlord for outgoings, rather than paying monthly instalments in advance, the adjustment at the end of each accounting period should be nil.

Get it right or miss out

In summary, if the relevant Act applies to the Lease and the landlord has not complied with the obligations regarding the recovery of outgoings, then the landlord may lose the right to recover those outgoings.

If you require help with any aspect of your business, including commercial leases, please do not hesitate to get in touch with our Commercial Leasing Team in Canberra.

Author:

Jennifer Jaeschke, Special Counsel
Commercial Leasing Lawyers
MV Law Canberra
ph. (02) 6279 4444

Sheng Ho, Lawyer
Commercial Leasing Lawyers
MV Law Canberra
ph. (02) 6279 4444