Outgoings - Am I Being Overcharged?
Birdsong Legal recently saved a client over $200,000 in outgoings under a single lease when we assisted them with a review of their outgoings.
Outgoings are amounts which a tenant must pay or reimburse a landlord in respect of a leased premises and can constitute a significant expense for a tenant. They are potentially a very complex aspect of leasing because there are numerous ways to calculate the contributions a tenant must make to outgoings, and those contributions may be subject to various restrictions and qualifications in the provisions of the relevant lease as well as under legislation. Further, each landlord or agent may have their own way of presenting the outgoings.
Outgoings arrangements are highly regulated under the retail tenancies legislation throughout Australia, but are generally a matter for commercial negotiation where such legislation does not apply. Accordingly, tenants (and landlords) should be acutely aware of their rights and obligations under the applicable retail tenancies legislation, while contributions to outgoings under leases not regulated by such legislation should be considered to ensure that they are fair and reasonable when negotiating a new lease. Any outgoings estimates, assessments and reconciliations should be carefully reviewed for accuracy.
Leases Generally
There are numerous reasons why outgoings assessed in relation to a leased premises may be incorrect. A tenant who receives an outgoings assessment should examine it and consider:
1 Are all the categories of outgoings included in the assessment permitted to be recovered under the lease (and any applicable legislation)?
Most leases prohibit the recovery of capital expenses incurred by the landlord. For example, Victorian Queensland and South Australian landlords are prohibited from recovering land tax from retail tenants[1], while recovery from NSW and WA retail tenants is somewhat restricted.
Where a tenant has negotiated outgoings arrangements which are different to the norm, it is easy for a landlord or agent to overlook this and charge outgoings to that tenant in the same way as to others in their portfolio.
2 Are there any caps or restrictions upon those categories of outgoings?
For example:
(a) are the amounts required to be “reasonable”;
(b) are there limits upon increases in those amounts from year to year?
Where a landlord provides services to a premises via a contractor with whom the landlord has a relationship (either in a corporate or business sense), it is important to ensure that amounts charged reflect market price for services of that quality.
3 Is the proportion being allocated to the premises correctly calculated?
Outgoings will usually be apportioned between the premises “benefitting” from the outgoing based on lettable area. A tenant of a premises that does not benefit from the expenditure generally does not have to contribute to that outgoing.
An example might be a grease trap, to which restaurants may be obliged to contribute, but a clothing shop would be unlikely to be required to do so.
4 Are the figures presented accurate? Have those figures been properly audited by an independent party or evidence of the amount actually payable by the landlord provided?
It can be very difficult to determine whether outgoings are accurate based solely on a figure. Exercising some vigour in reviewing the outgoings can lead to identification of errors. For example, it may become evident that a broad category of “repair and maintenance” includes costs related to a particular premises (or number of premises) or capital expenditure.
It should also be kept in mind that if a landlord is able to recover all outgoings from its tenant(s), then the incentive to minimise unnecessary expenditure may wane.
5 Have the amounts increased remarkably between one year and the next?
A significant jump in a category of outgoings warrants an explanation.
Retail Leases – Victoria
The Retail Leases Act 2003 (Vic) (RLA) has extensive provisions regarding how outgoings are dealt with, including:
requirements to provide estimates in disclosure statements and annually during a lease;
limits upon categories of recoverable outgoings (eg no land tax, limited management fees);
provisions ensuring outgoings are recoverable in proportion to the benefits the premises receives; and
requirements to provide evidence of outgoings incurred and expenditure reconciliations.
Despite (or perhaps because of) the prescriptive nature of the RLA, outgoings recovery has been the subject of significant litigation, case law and the occasional amendment to the legislation to deal with identified difficulties.
Given the scrutiny, assuming a reasonably competent landlord / agent, chances are that tenants who are required to contribute to all building outgoings under standard retail leases are likely to be being correctly charged. This is particularly the case for leases in a standard form, such as the Law Institute of Victoria form of lease.
Nevertheless, the complicated nature of outgoings means outgoings information should still be carefully reviewed, rather than simply accepted.
Negotiating Outgoings under a New Lease
Where practicable, tenants should take a proactive approach to reviewing and negotiating contributions to outgoings when entering into a new lease. After all, if rent is a factor in a tenant’s decision to lease a premises, the level of outgoings should also be relevant.
That said, tenants should keep in mind the old adage that “you get what you pay for”. Comparatively low outgoings may indicate limited or inferior services or conditions. After all, do you really want the landlord to minimise cleaning costs or pest control? It is important that the balance is right.
While many outgoings are unavoidable and effectively beyond debate (particularly council rates and water rates and building insurance), there are others that should be limited to “reasonable” amounts or qualified or capped in some way – some examples may be costs related to repair and maintenance, gardening and landscaping and management fees.
Alternatively, a landlord may be willing to agree to alternative rent and outgoings structures altogether – including gross rent leases (where the rent cover all outgoings) and partial gross leases (where tenants contribute to limited categories of outgoings). These arrangements shift the risk for increases in outgoings between the parties. If the risk of increases is appropriately factored into the gross (or partial gross) rent, the simplicity of such arrangements can be of significant benefit.
Specific Examples of Outgoings Issues
Land Tax
Land tax is payable in respect of land based on a several factors, including the value of the landowners’ total land holdings, whether the land is held under a trust and whether the landowner is a foreign entity. Where land tax is recoverable from a tenant, a tenant should ensure that the amount recoverable does not vary depending upon these factors and any contribution is deemed to ignore such factors. This is particularly important in relation to land tax surcharges payable by foreign owners. If a tenant is required to pay land tax at the rate the landlord pays land tax, then the tenant is effectively picking up the bill for surcharges related solely to the landlord, rather than the value of the land. This can be a significant issue in circumstances where ownership of the land changes, which can result in a massive increase in the land tax payable.
Car Parks
Some landlords include the cost of operating and managing car parks in their outgoings. That is appropriate where those car parks are generally available to tenants and their clients. However, where the car parks are only permitted to be used by those who pay for car park licences a landlord should not be seeking to recover (full) outgoings in respect of the car park from tenants of the building – they should be recovered from the licensee or car park users. Further, where the car park is licensed to or managed by a commercial operator for profit, the car park should be treated as “lettable area” for the purpose of apportionment of outgoings.
Dedicated services
Where services are acquired or installed to exclusively serve a tenant’s premises, that tenant should not have to contribute to the costs of providing equivalent services to other tenants in the building (other than to the extent those services are provided to common areas).
For example, a tenant that has installed their own air-conditioning plant and equipment should not have to pay the costs of electricity, servicing, repair and maintenance for air-conditioning provided to leased premises.
Likewise, a tenant on the ground floor of a building should not be required to contribute to the costs of lifts and elevators (unless there are basement levels).
Conclusion
Outgoings constitute a very complex aspect of leasing.
Tenants and landlords would do well to consider what the appropriate outgoings arrangements are in respect of any particular building or premises.
A judicious tenant will negotiate outgoings provisions where practicable before finalising any commercial arrangements, and carefully review outgoings assessments and information to ensure they are consistent with lease provisions and a landlord’s disclosures.
Further, landlords stand to benefit from accurate and transparent disclosure of outgoings, from a reputational perspective, by avoiding disputes, ensuring fairness and ensuring that their tenants are properly prepared for their financial obligations.
[1] “Retail tenants” being tenants under leases governed by retail tenancies legislation.