Splitting the bill: retail lease outgoings

When it comes to dinner dates, bar tabs and property maintenance costs, you’ll be hard pressed finding someone eager to foot the bill. Unsurprisingly, it is no different for tenants of retail leases.

Under the Retail Leases Act 2003 (Vic) (Act), a lease is classified as a retail lease if (amongst other things) the leased premises is used wholly or predominantly for the sale or hire of goods by retail or the retail provision of services.^[1] Inevitably, these retail premises require significant upkeep and unfortunately for tenants, do not maintain themselves.

One person’s outgoings are another person’s incomings?

When entering into a retail lease, a landlord must provide a tenant with a disclosure statement. Importantly, this document will contain estimates of outgoings: the expenses directly attributable to the:

operation, maintenance or repair of the property in which the premises is located; and
the rates, taxes or charges payable to the landlord as the owner or occupier of the building.^[2]

These estimates are particularly important. While a tenant cannot avoid paying outgoings if the estimates are slightly incorrect, if they are so inaccurate so as to breach the requirements of the Act, a tenant may be able to avoid payment altogether.

To pay or not to pay?

Apart from outgoings which a landlord is specifically prohibited from recovering under the Act, the specific outgoings which can be passed onto a tenant primarily depend on the specific terms of the retail lease and the disclosure statement. For example, if there is more than one lease within a particular property, the outgoings are typically apportioned according to the lettable area the premises bears to the property’s total lettable area. However, this isn’t required by law – meaning the lease is wholly responsible for establishing how outgoings will be calculated and apportioned.

Nonetheless, there are some non-negotiables when it comes to costs that cannot be imposed on tenants. In several cases, VCAT has found that where a building owner is required to carry out any work regarding Essential Safety Measures^[3] – such as fire alarms or sprinkler systems – and has not, a tenant can complete such work and recover from the landlord expenses incurred.^[4] Further costs that landlords cannot pass onto tenants include:

certain repair and maintenance obligations;
land tax;
capital costs and expenses not benefiting the premises; and
legal costs.^[5]

Check, please.

In order to avoid that awkward end of dinner date cheque dance, before entering into a lease, landlords should concentrate on providing estimates for outgoings that are as accurate as possible. If, however, such estimates prove to be incorrect, it is important to issue a revised estimate during the relevant accounting period. Similarly, it is crucial that tenants are aware of which outgoings they are required to pay. If all goes smoothly, there might just be a second date.

^[1]Retail Leases Act 2003 (Vic) s 4
^[2]Ibid s 3
^[3]Building Act 1993 (Vic) s 251
^[4]McIntyre & Anor v Kucminska Holdings Pty Ltd [2012] VCAT 1766; Chen v Panmure Hotel Pty Ltd [2007] VCAT 2464
^[5]Yan & Anor v Wang & Anor [2008] VCAT 2405