Why you need to know about outgoings

What are outgoings?

Outgoings are expenses incurred by the landlord arising out of its ownership of the premises.

Typical outgoings include:

• Taxes fees and charges – e.g. Council rates, water rates, land tax
• Day to day costs – e.g. cleaning, garbage collection
• Maintenance and repair services – e.g. air conditioning service
• Marketing and advertising services (if the subject premises are within a shopping centre)

Outgoings are usually treated separately to charges for utility services (such as electricity, water usage, telephone and internet).  The extent to which a tenant is required by the landlord to contribute towards the cost of some (or all or even none) of the outgoings depends on what the parties negotiate.

Set out below are some of the main questions to be considered by both parties when entering into lease negotiations.  It is imperative that whatever is negotiated is reflected in the lease documentation (including the Agreement to Lease, Lease and the Disclosure Statement – if a retail lease).

What outgoings apply to the premises?

From the outset, the landlord should be clear as to what outgoings are incurred for the premises and the approximate cost of those outgoings.  This will assist with the lease negotiations.

It is particularly important to identify what outgoings relate specifically to the subject premises, and what outgoings apply to the entire building, and therefore need to be apportioned between the respective occupiers.  If the water usage, for example, is separately metered for each separate premises, then the landlord should ensure that the water meter is only for water actually servicing those premises, and not any of the neighbouring premises (see below).

Is the rent inclusive or exclusive of outgoings?

The rent payable under a commercial lease (retail or not) can be structured in a few different ways:

• Inclusive of outgoings
• Inclusive of outgoings, but the tenant must reimburse the landlord for any increases in the outgoings incurred during the term of the lease
• Exclusive of outgoings, in which case the tenant pays for outgoings on top of the agreed rent.

Is it a commercial lease or a retail lease?

Commercial leases are unregulated.  Therefore a landlord could negotiate for a tenant to pay all of the outgoings for the premises – of course, whether or not the tenant agrees to some or all (or none) of the outgoings depends on the bargaining power of each party.

Retail leases (as defined in section 3 of the Retail Leases Act 1994 (NSW)) are subjected to the Retail Leases Act, which provides the following in relation to lease outgoings:

• Outgoings include the landlord’s:
  • expenses attributable to the management, operation, maintenance or repair of the building or land.
  • rates, taxes, levies, premiums or charges payable in relation to the building or land.
  • fees charged in relation to its management, operation, maintenance or repair of the building or land (section 3A).
• The tenant is not required to pay outgoings not included in the Disclosure Statement (section 12A) and estimates of those outgoings must be provided (section 27).
• The lease must specify what outgoings are recoverable, how the amount payable will be determined (and how apportioned, if relevant), and how they will be recovered by the landlord from the tenant (section 22).
• The landlord cannot recover capital costs (section 23), depreciation (section 24), interest on borrowings (section 24A) from the tenant.
• The landlord may require the tenant to contribute to a sinking fund for major items of repair or maintenance (section 25).
• The landlord is limited as to how much land tax can be recovered from the tenant (section 26).
• If details of the outgoings are not provided, the tenant can withhold payment of those outgoings until it receives the estimate (section 28A).

What outgoings are payable?

• The parties must clearly and specifically detail within the lease the outgoings that will be payable by the tenant.
• If a particular outgoing cost relates to more than one property (e.g. water rates for 2 separate leased premises within the same building), then the lease must specify how those rates will be apportioned between the tenants. Such apportionment must be fair and reasonable.
• The lease should also specify when and how the landlord seeks payment of the outgoings by the tenant – typically, the landlord will incur the outgoing expense then provide details of the outgoing for reimbursement by the tenant.  Alternatively, the landlord may provide an estimate of the annual outgoings, then require the tenant to make a periodical payment towards the cost of outgoings.  Any difference between anticipated and actual outgoings should be picked up in an outgoings audit, and an allowance made accordingly.
• How are increases in any outgoings to be dealt with, particularly if the rent is inclusive of outgoings.
• Tip for landlords – negotiate for the tenant to be liable to pay for any increase in outgoings, over and above the value of the outgoings already included in the rent
• Tip for tenants – negotiate a provision which caps the amount of outgoings payable.

Troublesome outgoings

Reviewing recent case reports in relation to lease issues highlights some common issues with outgoings.

• Cleaning of the grease trap
  • Marcinko & Boceanu and Ors [2001] ACAT 34 – the lease said that the tenant would be responsible for any disposal service or utility the local authority provided to the premises.  The grease trap was located in the common area, and available for use by all commercial units within the complex.  Held – the cleaning obligation did not fall on the tenant.  Also, the landlord failed to include the cost of the cleaning in the disclosure statement.
• Water usage
  • AAP Engineering Pty Ltd v Fernlog Pty Ltd [2017] NSWDC 141 (9 June 2017) – the lease said that the tenant would pay to the proper authority all charges for utility and other services connected and separately metered to the premises, and that if the tenant didn’t so pay, then the landlord could pay and be reimbursed by the tenant.  The landlord made all the payments to the authorities and sought reimbursement from the tenant.  The tenant argued that it did not have to pay for those utilities unless they were separately metered, and sought repayment of the token amounts it had already paid to the landlord. The separate water meter included some hoses for the neighbouring premises (as occupied by the landlord) and the electricity meter included some lights for the neighbouring premises. It wasn’t until the 5^th year of the lease that the landlord sought reimbursement for the water and electricity, and the tenant only made some payments for fear of having the electricity switched off.  Held – the Court found in favour of the tenant.