Time to Pay Up: Retail Shops Leases and the Obligation to Provide Estimates of Operating Expenses

Trimet Holdings Pty Ltd (Trimet) leased a retail shop from Investment Club Pty Ltd (Investment), which lease commenced on 1 November 2020 for a term of 10 years. The Lease was governed by the Commercial Tenancies (Retail Shops) Agreements Act 1985 (Act). Among other things, section 12 of the Act governs when a tenant is required to pay any or all of the operating expenses of the landlord.

In effect, section 12(d) of the Act provides that if provision is made in a retail shop lease for payment by the tenant of all or any of the operating expenses of the landlord, the lease shall be taken to provide that:

  1. the tenant is not required to make any payment of, and the landlord is not entitled to recover, any such operating expenses in respect of a year or part of a year until at least one month after the landlord has given to the tenant annual estimates of expenditure under each item of operating expenses in respect of the year; and
  2. the landlord is required to give to the tenant a written operating expenses statement that details all expenditure by the landlord in each accounting period of the landlord during the term of the lease on account of operating expenses to which the tenant is required to contribute, within 3 months after the end of the accounting period to which it relates.

Further, section 12(1d) of the Act provides that if a landlord does not comply with the requirement to provide a written operating expenses statement, the tenant is not obliged to pay, and the landlord is not entitled to recover, operating expenses from the date of that non-compliance until the landlord complies.

The effect of section 12(1)(d) is that it suspends, rather than extinguishes a tenant’s liability to pay operating expenses. However, as estimates must be at least partially prospective, once the expenditure in the relevant year has been fully incurred, no estimate can be given. In those circumstances, the suspension of the tenant’s liability to pay operating expenses becomes permanent.

Investment failed to provide Trimet with annual estimates of outgoings and operating expenses statements.

In reliance upon Investment’s failure to do so, Trimet commenced proceedings in the District Court and claimed that it was not legally obliged to make payments for outgoings, and sought restitution for payments which had already been made, on the basis that they were paid under a mistake of law.

The District Court held that each of the payments were made under a mistake of law, but with the exception of the last payment of each year, Investment had established its defence that it gave good consideration for each payment (on the basis that it discharged a debt).

Trimet challenged the District Court’s findings, among other grounds, on the basis that the primary judge erred in finding that Investment gave good consideration for most of the mistaken payments.

Trimet asserted that section 12 of the Act meant that, at any time before complying estimates are given, there is no obligation for the tenant to pay, but if such an estimate is given before the expiry of the year, an obligation will retrospectively come into existence in respect of the whole of the relevant year.

The Court of Appeal did not accept this contention. Rather, the Court found that at the time of each of the payments, Trimat was subject to an obligation to pay, but its requirement to perform, and Investment’s entitlement to enforce performance of, that obligation was suspended until the required estimates were given.

In relation to the good consideration defence, the Court of Appeal took a contextual approach to the question of whether there was a “debt” (the discharge of which would amount to good consideration for a mistaken payment). The contextual approach meant that the question was to be determined in a practical and common sense way, having regard to the purpose of enquiry, being whether a claim for restitution of a mistaken payment should fail on the ground of good consideration.

The Court held that “debt” is not a word of precise and inflexible meaning. Importantly, the Court of Appeal found that contingent debts were not excluded from being “debts” for the purpose of the good consideration defence. It follows, then, that in making payments, Trimet’s obligation to pay the sum was discharged, and was good consideration for the payment.

Lavan comment

Whether you’re a landlord or a tenant, it is important to understand your obligations and liabilities under a retail shops lease. The implications of getting it wrong can be disastrous.

If you have questions in relation to your retail shops lease, or if a dispute has arisen, please do not hesitate to contact Cinzia Donald.