Essential safety measures - recoverable outgoings or smoke and mirrors?
Commercial Tenancy: 28 October 2020
The Retail Leases Amendment Act 2020 clarifies the entitlement of landlords to recover from tenants the costs of installation, repair and maintenance of essential safety measures (ESMs). These changes apply to new and existing leases, however, the landlord cannot recover ESM costs incurred before the commencement of the Amendment Act. In practice, the change might benefit only sophisticated landlords such as shopping centre owners. For many landlords, the benefit is illusory because the cost of qualifying to become entitled to recover the ESM cost will often exceed the amount recoverable.
Section 46 of the Retail Leases Act 2003 provides that a landlord cannot recover outgoings from a tenant unless the landlord provides the tenant with an itemised outgoings estimate at least one month before the start of each lease year (or another accounting period). Section 47 requires the Landlord to provide a Statement of Outgoings at the end of the lease year and section 48 requires an adjustment to be made for any under or overpayment as the result of any difference between the estimate and the Statement.
The Statement must be prepared in accordance with applicable accounting standards and (unless the only outgoings recovered are GST, rates and taxes, insurance or other prescribed expenses) must be audited by a registered company auditor and be accompanied by copies of the evidence of payment of these outgoings by the landlord. For a shopping centre landlord with multiple tenancies and the ability to recover management expenses, cleaning and security costs etc., the cost of an audited report may well be justified.
For most landlords, however, the cost of obtaining an audited report may outweigh the ESM costs and will result in them not seeking to recover ESM costs.
For landlords of retail premises (but interestingly, not non-retail premises) there is another option. The amending Act also amends section 251 of the Building Act 1993 which previously entitled any occupier who carried out ESM repairs or maintenance to recover the cost from the building owner - irrespective of any provision in the lease. Section 251 as amended now provides that there is no entitlement to recover from the landlord if the tenant has agreed to bear the expenses under a retail premises lease.
Importantly, sections 46 & 47 do not apply where the lease requires a tenant to pay the outgoing direct to the relevant authority or supplier.
The practical course might therefore be to ensure your retail lease requires (or at least, permits the landlord to impose an obligation on) the tenant to repair and maintain ESMs at its own cost.
For commercial tenancy advice, including retail leasing, and other property issues please contact our property law team.