Victorian Retail Leases: What are Outgoings?
Outgoings are costs incurred by a landlord in relation to a premises or, in the case of a multi-occupancy property such as a shopping centre, the premises and the shopping centre property. There are key differences between retail leases and commercial leases. Whether a lease is classified as a retail lease or a commercial lease is a question of fact, which is determined by looking at the definition of "retail premises" in the Retail Leases Act 2003 (Vic) (the Retail Leases Act). If a premises is determined to be retail premises, then the lease for that premises is a retail lease.
The Retail Leases Act contains provisions relating to the recovery, or otherwise, of 'outgoings'. This article refers to Victorian legislation.
Definition of Outgoings in the Retail Leases Act
The Retail Leases Act (section 3) defines 'outgoings' as follows:
'outgoings means a landlord's outgoings on account of any of the following—
- the expenses directly attributable to the operation, maintenance or repair of—
(i) the building in which the retail premises are located or any other building or area owned by the landlord and used in association with the building in which the retail premises are located; or
(ii) in the case of retail premises in a retail shopping centre, any building in the centre or any areas used in association with a building in the centre;
(b) rates, taxes, levies, premiums or charges payable by the landlord because the landlord is—
(i) the owner or occupier of a building referred to in paragraph (a) or of the land on which such a building is erected; or
(ii) the supplier of a taxable supply, within the meaning of the A New Tax System (Goods and Services Tax) Act 1999 (Cth), in respect of any such building or land.'
Can Outgoings be Passed Onto a Retail Tenant?
Whether outgoings can be recovered from a retail tenant does NOT solely depend on what has been agreed between a landlord and tenant and specified in the retail lease.
If a retail lease does not specify that a particular type of outgoing is payable by the tenant, then the landlord cannot require the tenant to pay it or recover it from the tenant if the landlord pays for that outgoing.
If a retail lease specifies that a particular type of outgoing is payable by the tenant, but this type of outgoing is prohibited by the Retail Leases Act, then the landlord cannot require the tenant to pay it or recover it from the tenant if the landlord pays for that outgoing.
In short, if a lease specifies anything, including the payment of outgoings, which is contrary to, or inconsistent with the Retail Leases Act, then the provision in the lease is void to the extent of that inconsistency.
A typical retail lease will outline the specific outgoings which the landlord proposes to pass onto the tenant. In this regard, tenants should get legal advice about the lease agreement generally, and in particular the outgoings which they are legally obliged to pay.
GST on Outgoings
A tenant may be required to pay goods and services tax (GST) on outgoings payable by the them depending on factors such as whether the landlord is registered for GST and whether the supply of the relevant service is a taxable supply.
Outgoings That Cannot Be Passed Onto Retail Tenants
The Retail Leases Act specifies that the following outgoings cannot be passed onto tenants:
- Land tax;
- Expenses that do not benefit the premises;
- Contributions to a sinking fund for capital works;
- Rent payable by the landlord in respect of any head lease;
- Management fees, unless the management fees relate to the management of the building or shopping centre in which the premises are located;
- Capital costs; and
- Interest on borrowings.
Additionally, a retail landlord is not permitted to charge or pass on costs in relation to:
- Legal or other expenses in connection with the negotiation, preparation, or execution of the lease;
- Obtaining the consent of a mortgagee to the lease; or
- The landlord's compliance with the Act.
A Retail Lease Must Specify Outgoings
Section 39 of the Retail Leases Act provides that a tenant under a retail premises lease is not liable to pay outgoings except if the lease specifies:
- the outgoings that are to be regarded as recoverable; and
- how the amount of those outgoings will be determined and how they will be apportioned to the tenant if apportionment is required; and
- how those outgoings or any part of them may be recovered by the landlord from the tenant.
Landlords must be prudent to ensure that their lease agreements comply with the above conditions. It can be costly to the landlord if the tenant can avoid payment of an outgoing or outgoings on a technical point.
Tenant Must Be Given Estimate of Outgoings
Section 46 of the Act requires that the landlord must give the tenant an annual estimate of all outgoings:
- before the lease is entered into, AND
- at least one month before the start of each of each financial year, during the term of the lease.
Not providing the estimate means that the tenant is not liable to pay the outgoings until the tenant is given that estimate. The VCAT case of Phillips v Abel [2019] VCAT 1031 found that a landlord cannot retrospectively recover outgoings from a tenant which accrued during any period prior to the annual estimate of outgoings being provided to the tenant.
Inaccurate Estimates of Outgoings
Generally, a tenant cannot avoid paying outgoings because the estimate given under Section 46 proves to be inaccurate. A landlord is merely required to provide a somewhat accurate annual estimate of an outgoing. An estimate which is so inaccurate may be deemed to constitute a non-compliant 'estimate,' because it could mislead or deceive the tenant.
Expert Retail Lease Advice and Assistance
Whether you are landlord or tenant, ensuring you are fully informed and understand your rights and obligations under a retail lease is essential. The prescriptive nature of retail leasing law means that either party can unwittingly overpay or underpay when it comes to outgoings. Resolving retail leasing issues quickly and effectively requires niche legal knowledge and practical experience.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
