Improperly recovered outgoings? What it means for landlords
Written by Ben Grady – Partner, Casey Minns – Associate, Olivia Muscat – Graduate, Bram Cairns - Paralegal
Most retail and commercial leases in the Australian Capital Territory are regulated under the Leases (Commercial and Retail) Act 2001 (ACT), commonly referred to as the Leases Act. It is the Leases Act which (amongst other things) strikes the balance between landlord and tenant rights concerning conduct, negotiations, security, alterations, assignments of lease and the recovery of outgoings. It is the (improper) recovery of outgoings which we see as one of the most popular points of contention between landlords and tenants.
So, what outgoings are recoverable?
Section 70 of the Leases Act states that a landlord may recover the following outgoings from a tenant:
- general rates, taxes, levies or other statutory charges payable by the landlord as owner of the building; and
- a reasonable expense directly related to the operation of repairing or maintaining the building. This could include expenses associated with insurance, management costs, cleaning and air conditioning.
The above is not an exhaustive list of the outgoings which can be recovered by a landlord.
The key requirement is that the outgoing is an expense incurred by the landlord and directly related to ownership or the maintenance and operation of the building.
What are the requirements for valid recovery? To recover outgoings, it is critical that:
- the nature of the outgoing is stated in the disclosure statement, which was issued and signed by the parties at the same time as the lease; and
- the provisions of the lease state:
- the landlord is permitted to recover outgoings;
- the outgoings which are recoverable and how they are to be determined; and
- the tenant’s proportion of the outgoings; and
- the outgoings are to be recoverable outgoings under s.70 of the Leases Act.
If any of the above requirements are not met or are unclear, the tenant will likely have reasonable grounds to reject the landlord’s attempted recovery of outgoings or at least the extent to which the landlord is attempting to recover outgoings.
Here are two examples:
- the terms of the lease state the landlord is permitted to recover outgoings, states the outgoings that are recoverable and the tenant’s proportion, but there is no disclosure statement, or the disclosure statement does not refer to or state the outgoings recoverable under the lease. In either case, as the requirements of the Leases Act have not been satisfied, the tenant has reasonable grounds to dispute the attempted recovery of outgoings by the landlord; and
- for premises which are separately metred for water consumption or other services and the landlord is the account holder, the terms of the Lease state the Landlord is entitled to recover all costs and expenses associated with water consumption and other services connected to the premises, but the disclosure statement does not refer to water consumption or those other services. Like above, as the requirements of the Leases Act have not been satisfied (i.e, disclosing the nature of the outgoings in the disclosure statement), the tenant has reasonable grounds to dispute the attempted recovery of water consumption and other services by the landlord. This is the case despite the costs and expenses being directly related to or metred to the premises.
Why does it matter?
Where a lease does not satisfy the requirements of the Leases Act and a landlord cannot validly recover outgoings from a tenant, it has significant consequences for the protection of the income derived from the landlord’s investment. Not only that, but the time and costs associated with enforcing the recovery (which is not always successful) often far outweighs the amount recoverable from the tenant.
It is important to note that even though a tenant may still be paying an amount to the landlord for outgoings, doing so does not waive the tenant’s right to recover from the landlord the amount of any overpayment or improper payment on account of improperly recovered outgoings. This could mean that a tenant who has mistakenly paid an amount(s) for outgoings to the landlord for several years is entitled to a refund equivalent to that payment.
If you have any queries or require advice regarding the above, please do not hesitate to contact our Property Team on 6128 0755.