Chris Drayton
11 April 2012

‘Carbon Tax’ and Leases

Chris Drayton


Tel: 02 9233 9029

Mob : 0421 006 305


Charities and Not-For-Profits

Corporate and Commercial



The Carbon Tax needs to be taken into account by landlords and tenants of industrial, commercial and retail tenancies both in respect of existing tenancies and prospective tenancies.

As you will no doubt be aware, as from 1 July 2012 the “Carbon Tax” will be with us.

A preliminary question which arises is – what is the Carbon Tax? The simple answer to this is that it is a tax imposed by the federal government in order to try and reduce carbon pollution. Click here to visit the Australian Government’s clean energy future website.

The effect of the Carbon Tax is generally expected to be the increase in price of energy and materials passed on by suppliers who are having to pay the Carbon Tax. It can be said with some confidence that the average industrial, commercial and retail landlord will not directly have to pay the Carbon Tax but will be paying it in an indirect way by way of paying increased amounts for energy supplies.

It is appropriate to deal with the impact of the Carbon Tax on leases by splitting the leases between existing leases and prospective leases.

Existing Leases:

Landlords under existing, industrial, commercial and retail leases who are charging net rents plus outgoings need to check their existing leases to ascertain whether their outgoings provisions will allow for recovery of the increased energy amounts. If the leases do allow for such recovery then essentially, the short term impact of a Carbon Tax on a landlord will be minimal in that it will pass on increased costs to it, to its tenant. Conversely, a tenant under such a lease should ensure that it is familiar with its obligations under outgoings provisions to ascertain whether or not it has an obligation to pay such amounts.

In relation to retail leases that are subject to the Retail Leases Act 1994 (NSW) the landlord and tenant should refer to not only the lease document but also disclosure statements to confirm whether or not they are in fact liable for the increased amounts.

More problematic for a landlord is if the existing lease is a gross lease. If the landlord has not allowed a sufficient “buffer” in the rent calculation and rent increases then it is possible that the impact of a Carbon Tax will be adverse on the landlord assuming the lease does not contain a provision which would allow the landlord to recover the increased amounts. Landlords who intend to rely on clauses that allow for recovery of taxes imposed are unlikely to be successful in such a claim given that the tax is not being imposed generally, direct on the landlord but, the impact is felt by the landlord by the increased energy costs. Again, conversely a tenant should familiarise itself with its rights under its lease in respect of the matter.

Prospective Leases:

Both landlords and tenants in negotiations for prospective leases need to factor in the impact of the Carbon Tax. This may for example lead to a landlord deciding against a gross lease and having a net lease, or, for example, having a gross lease negotiated at an amount that the landlord sees as suitable in providing a sufficient buffer for the impact of the Carbon Tax and increased energy costs. On the other hand, the tenant in such negotiations will need to make a decision whether or not it is willing to bear the brunt of these increased costs.

Longer term

t is likely that longer term the landlords will find that they need to spend more money to upgrade their buildings in order to try and reduce increased costs which tenants are having to pay or the tenant will look to lease more energy efficient premises.

Review existing leases

In our view, it is important that landlords and tenants now undertake a review of their leasing documentation to ascertain whether or not the landlord is entitled to pass on the increased costs and whether there is an obligation on the tenant to pay the same. Of course with most legislation of this nature, as the tax becomes operational, further impact may be identified in relation to leases and we will keep you up to date on this. Please contact us if we can be of assistance to you on this lease issue or any other.

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