There is long standing discussion surrounding which outgoings are permissible for landlords to pass onto tenants.

Generally, whether outgoings can be passed onto the tenant will depend on what has been agreed between the parties in their retail lease agreement. 

Where it has been agreed that certain outgoings must be paid or reimbursed by the tenant, the landlord must be careful to comply with the obligations imposed by the Retail Leases Act (and associated regulations) in relation to recovering such costs.  For example, the landlord cannot pass on outgoings unless it has specified as to the type of outgoings and given an estimate annually to the tenant (section 39 of the Retail Leases Act). If the landlord does not strictly comply with such obligations, the tenant will have a basis on which to refuse payment.

There are however certain outgoings which, regardless of any agreement between the parties, cannot be passed onto a tenant.  For example, the Retail Leases Act states that outgoings such as land tax, capital costs and interest on borrowings to name a few, cannot be passed onto tenants.

Can Essential Safety Measures be passed onto tenants?

The Retail Leases Act does not specify whether a landlord is permitted to pass on to tenants the costs of complying with Essential Safety Measures (“ESM”) under the Building Act 1993 (and associated regulations).  Accordingly, this question has vexed landlords and tenants.  However, it has  now received some clarification with the release of an advisory opinion by VCAT on 1 May 2015 (“the Opinion”). 

The Opinion states that the cost of complying with ESM under section 251 of the Building Act cannot be passed onto a tenant. A landlord can require a tenant to undertake some (not all) ESM, provided the landlord pays the tenant’s associated costs.  As a result, any lease provision that requires a tenant to foot the cost of ESM obligations is inconsistent with the Building Act and therefor void.

Interaction with the Retail Leases Act

The Opinion also outlines how ESM obligations interact with the Retail Leases Act.  The key points regarding interaction with the Retail Leases Act are as follows:

• The landlord is responsible for providing and maintaining ESM in accordance with section 52(2) of the Retail Leases Act. In other words, ESM must be provided in order to maintain the retail premises in a condition consistent with the condition of the premises when the retail lease was entered into, and the ESM:
  • forms part of the structure of, or is a fixture of the retail premises; or
  • constitutes plant or equipment of the retail premises; or
  • is an appliance, fitting or fixture provided under the lease by the landlord relating to gas, electricity, water, drainage or other services.

Unless the need for repair of the ESM arises out of misuse by the tenant , or the tenant is entitled or required under the retail premises lease to remove the ESM at the end of the lease.

• The landlord cannot require a tenant to provide or maintain ESM where provision or replacement of the ESM is a capital cost under section 41 of the Retail Leases Act.

• The landlord cannot require a tenant to provide or maintain ESM where the requirements of section 39 and of the Retail Leases Act and the Regulations are not met.  Section 39 sets out the requirement to specifically identify which outgoings are payable and how they will be determined and apportioned.

This may leave some landlords questioning which repair and maintenance costs, if any, can be recovered from a tenant?  The answer is, costs will be recoverable where:

• section 251 of the Building Act does not apply;
• section 52(2) and section 41 of the Retail Leases Act do not apply; and
• where the landlord has satisfied the requirements of section 39 of the Retails Leases Act and the Regulations concerning outgoings.

Where to from here?

Whilst VCAT’s comments are no more than an “opinion”, the Opinion would still be highly persuasive in VCAT or any other court facing this issue. All Landlords should therefore take the Opinion seriously as tenants now have a valid basis on which to reject payment of such outgoings.

Landlords should cease charging tenants for ESM they are no longer permitted to charge for and carefully consider the outgoings being charged. Moving forward, landlords may want to consider higher gross rentals in order to take all costs into account.

If you are uncertain of your obligations as a landlord or tenant please contact us for further advice.