Commercial leases and outgoings

In a commercial or retail lease, what does the landlord pay for and what does the tenant pay for with respect to the leased premises?

In addition to the rent, the tenant will often be responsible for reimbursing the landlord for outgoings payable under the lease, for example rates, use of services and costs of on-going cleaning and day to day repairs and maintenance. The landlord will generally pay for the repair or replacement of certain fixtures, fittings or equipment on the premises caused by fair wear and tear.

However, the above obligations are not standard to all leases and by no means apply to every situation. When negotiating a new lease it is imperative that the obligations of the landlord and the tenant are discussed and clearly reflected within the lease documents so that there is less likelihood of a dispute later on.

A recent decision at the ACT Civil and Administrative Tribunal (ACAT) demonstrated the importance of using clear and specific wording in relation to lease outgoings. In the case (Marcinko & Boceanu and Ors [2011] ACAT 34) the landlord of a commercial tenancy called on the bank guarantee (held by the landlord as a security bond) because of the tenant’s failure to clean the grease trap during the term of the lease. The landlord relied on a clause in the lease which stated that the tenant was responsible to pay for “any electricity, power, fuel, gas, oil, water, telephone, garbage removal, waste disposal and other services or utilities provided by public, local or statutory or other authorities or suppliers to the Premises, to the supplier of the service or utility.” (“the Clause”)

The Tribunal considered whether the Clause clearly and specifically endowed on the tenant the responsibility of paying for the cleaning of the grease trap and decided that it was a matter of interpretation of the lease. To determine the answer, they considered the words used to set out the tenant’s responsibilities in the lease, as well as the surrounding circumstances and the conduct of the parties.

The Tribunal found that the Clause did not require the tenant to clean the grease trap because cleaning the grease trap did not fall into the definition of “other services provided to the premises”. It was found that the Clause specifically referred to services provided “to the premises”, however the grease trap was located in the common area and connected to and available for use by all commercial units in the complex. It was not specifically in the premises and so could not be covered by the Clause.

Furthermore, the disclosure statement provided to the tenant prior to the commencement of the lease made no mention of the tenant’s obligation to pay the costs of cleaning the grease trap.

The Tribunal held that in these circumstances the tenant was not obliged to pay for the costs of cleaning of the grease trap because of ambiguity in the wording of the Clause. By considering the “ordinary meaning of the words” contained in the lease, it was found that the responsibility did not lie with the tenant. The landlord’s calling upon the bank guarantee in these circumstances was deemed invalid.

Having a clear understanding of your responsibilities as either the landlord or the tenant and being as specific as possible in the wording used in the lease will assist to avoid potential disputes later down the track.

Some examples of issue on which a landlord and tenant should be clear on are:
  • What are the outgoings that relate to the leased premises?
  • Who is responsible for the payment of each outgoing and how will it be paid? For example, will the landlord pay for all outgoings and the tenant will reimburse the landlord? Will the cost of some outgoings be shared between the landlord and tenant? If so, then in what proportions?
  • Does the landlord intend to increase outgoings each year in conjunction with each rent review? How is this increase to be calculated?
  • Who is responsible for repairs and maintenance of the fixtures, fitting and any equipment on the premises? Who is responsible for repairs and maintenance to the Premises itself, or to the common areas (if applicable)?

It is important that the above details be outlined clearly in the lease and disclosure statement so that the parties understand their obligations. Our team in Business Services will be able to assist you in developing and negotiating the proper wording to be used in your lease.

For more information or to make and appointment contact Shalini SRee:

e: ssree@elringtons.com.au | p: +61 2 6206 1300