Outgoings under a retail shop lease: Who has to pay?

Under the terms of a typical commercial lease, the lessee will be responsible for paying for some or all of the outgoings associated with the tenancy. The outgoings may be charged separately to the rent or form part of the agreed rent amount (often referred to as a ‘gross lease’).

The lease will often include terms setting out how outgoings are to be calculated and paid by the lessee during the term of the lease and may differ from lease to lease. For retail leases there are additional requirements under the Retail Shop Leases Act 1994 (Qld) (RSLA) which limit the way outgoings can be charged to a lessee.

What are outgoings?

Outgoings refer to expenses associated with the premises. These expenses may be initially incurred by the lessor and then are passed on to the lessee. Common examples of outgoings include:

• Council rates
• Body corporate fees
• Taxes
• Security fees
• Fire protection equipment
• Waste and sewerage fees
• Cleaning
• Insurance premiums
• Utilities (such as electricity, water, phone, and internet)

How are outgoings calculated?

The calculation of outgoings are typically based on the net lettable area of the premises relative to the total area of the building within which the premises is situated.It will also depend on whether the relevant services or utilities are available to the entire building or are limited to use within the premises.

What outgoings can a lessor charge a lessee for retail leases?

Section 7 of the RSLA sets out what services, costs and expenses are considered ‘outgoings’ for a retail shopping centre or leased building.

This includes:

• the lessor’s reasonable expenses directly attributable to the operation, maintenance or repair of the centre or building and areas (associated areas) used in association with the centre or building; and
• charges, levies, premiums, rates or taxes payable by the lessor because the lessor is the owner or occupier of—
  1. the centre or building; or
  2. the land on which the centre or building is situated; and
• an amount mentioned in section 24A(2).

The outgoing may be either an apportionable outgoing or a specific outgoing and the sum of the apportionable outgoings and specific outgoings is the lessor’s outgoings.

However, the lessor’s outgoings cannot include—

• land tax payable on the land on which the centre or building is situated;
• expenditure of a capital nature, including the amortisation of capital costs;
• contributions to a depreciation or sinking fund;
• insurance premiums for loss of profits;
• payment of an excess in relation to a claim on the lessor’s insurance policy for the centre or building or associated areas;
• lessor’s contributions to merchants’ associations and centre promotion funds; and
• payment of interest and charges on amounts borrowed by the lessor.

An example of expenditure of a capital nature includes the replacement costs of major items of plant and equipment in the centre or building, for example, air-conditioning systems.

Lessee’s liability to pay for outgoings

Section 37 of the RSLA outlines the conditions under which a lessee of a retail shop lease is liable to pay for the outgoings.  The lessee is only responsible for paying outgoings if the lease explicitly specifies:

• the types of outgoings they must pay;
• how these outgoings will be calculated and divided; and
• the method by which the lessor can recover these costs from the lessee.

The term ‘outgoings’ includes expenses related to promotion/advertising of the centre and maintenance, provided these are considered part of the lessor’s outgoings under the lease.

Apportionable outgoings

Under section 38 of the RSLA, a lessee’s liability for a proportion of the lessor’s apportionable outgoings in a retail shopping centre or leased building must be ‘fair and proportional’.

Specifically, the lessee’s share of these outgoings should not exceed the ratio of the area of their leased shop to the total area of all premises in the centre or building that benefit from the outgoing. This includes premises that are leased, occupied, or available for lease and would benefit from the outgoing.

The section also defines ‘prescribed purpose’ areas, such as those used for information, entertainment, community facilities, telecommunication equipment, ATMs, vending machines, advertisement displays, furniture, trade out areas, storage, and parking. These areas are excluded from the total area calculation if they would otherwise be considered common areas if not leased or licensed. This ensures that lessees only pay the share of outgoings based on the actual benefit received.

Annual estimate of apportionable outgoings

Lessors must provide lessees with an annual estimate of apportionable outgoings for which the lessee will be liable under the lease. 

This estimate must be given at least one month before the relevant period starts (typically 31 May in any given year) or upon lease commencement if within that timeframe.

For retail shopping centres, the estimate must include a breakdown of fees for administration and centre management. Each item in the estimate should not exceed 5 per cent of the total outgoings, unless it pertains to statutory charges or items that cannot be further itemised.

Audited Annual Statement of Outgoings

There are additional requirements under s38B and 38C for the lessor to provide lessees with an audited annual statement of apportionable outgoings within three months after the end of the relevant period (generally 31 August in any given year).

This statement must be prepared by a registered auditor according to accepted Australian auditing standards and must fairly present the lessor’s outgoings.

It should compare the estimated outgoings with the actual amounts spent and the total amounts paid by lessees.  Each outgoing item must be itemised, generally not exceeding 5 per cent of the total outgoings, unless it pertains to statutory charges or items that cannot be further itemised.  For retail shopping centres, the statement must also detail management fees paid by the lessee.

If the lessor does not give outgoings estimate or audited annual statement, the lessee may withhold payments in relation to apportionable outgoings until the lessor gives the outgoings estimate or audited annual statement to the lessee.

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