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Carbon Tax costs for retailers emerge

Retailers will have even more cause to carefully peruse the fine print when next they renegotiate their shopping mall lease, with a new ‘Carbon or Greenhouse Emmission Charge’ (allegedly) now included in new Westfield lease agreements.

News Ltd broke the story today in several of its dailies.

It is to be expected, according to the New Ltd reports, that other retail landlords will follow the lead set by Westfield.

Milton Cockburn, spokesperson for the Shopping Centre Council (SCCA), described the lease clause as ‘no different from an independent decision by an electricity supplier to increase the rate of electricity.

‘The reality is that there are recoverable outgoings in all leases and electricity is one of those recoverables,’ he said.

However, it’s not clear today whether the  new clause incorporated into lease agreements captures increases above and beyond shopping centre power bill hikes, and extends to other carbon-tax related costs the landlord incurs. Westfield is not elaborating and Mr Cockburn is firing off generalities.

News Ltd wrote; ‘according to a recent Westfield lease…Clause 12.5A will allow the landlord to pass on any carbon or greenhouse gas emission-related charge and recover the same from the Lessee at cost.’

But there would be no need to introduce a new clause (Clause 12.5A) to lease agreements if increases in electricity charges were already covered – so either the News Ltd report is wrong on the detail (and it needs to be noted News Ltd has adopted an anti-Carbon Tax position) or the waters are being muddied by vested interests.

By lunchtime today, the Prime Minister, Julia Gillard quoted the SCCA to support a claim that the new clause is in fact not new, does not directly refer to a carbon tax, and began appearing in some retail lease agreements years ago when debate about legislative action to combat greenhouse emissions started.

However Ms Gillard did not go on to refer to the SCCA’s comment that: ‘If the lease permits the recovery of such outgoings, this will mean some retailers will be paying higher prices for their electricity.’

Under standard retail lease agreements shopping centre landlords require retailers to contribute to the cost of shared utilities such as air-conditioning, cleaning and electricity.

This is, of course, in addition to their individual utility charges which are sometimes paid directly and sometimes (as with Westfield) paid to shopping centre management.

In addition, retail leases are commonly indexed to the CPI on an annualised basis. One recent report on retail leases claimed that Westfield is currently looking at an annual CPI + 2.5 percent hike – with the new carbon tax charge (if it exists) possibly laid on top of that.

The Government currently estimates that the carbon tax will add .9 percent to CPI to 2014-15. This is claimed by opponents of the tax as unrealistically optimistic.

In addition to increased electricity charges, the impact of the Carbon Tax on the costs of operating a commercial building are expected to increase by around 1.8 percent on average, according to an Allen Consulting Group report, and 1.4 percent for retail buildings specifically:

For a building with a gross lettable area – retail (GLAR) of 3000 square metres located in New South Wales, the CPM will increase annual operating costs by around 1.4 percent or $5.18 per square metre. As with office buildings the largest impacts are seen for energy costs, which will increase by an estimated 10.8 percent.

However, the costs for small retail tenants is likely to be larger, as major and anchor tenants are able to avoid paying their share.

An article in a retail real estate website outlines the areas of cost likely to hit smaller retailers, post-Carbon Tax:

– Greater rental increases through higher CPI based increases;
– Increased CAMs/Outgoings budgets as a result of higher Landlord operating costs – HVAC, Security, Cleaning, Electricity, Wages etc; and
– Increased asking rents as landlords seek to compensate for the operating costs above which are non-recoverable under Major/Anchor tenant leases.

In another article from the same website, three tips are given to retailers negotiating leases:

-Don’t accept the CPI as the benchmark for rental increases;
-Renegotiate with your landlord, explaining that it’s that of a vacancy and release scenario;
– If you do have a CPI indexed review, always make sure the right index is used.

COMMENT: OK, someone’s telling porkies, and between the SCCA spinmeister, Julia Gillard and News Ltd I’m not inclined to make a call. They’ve all got form! Anyone out there able to shed more light on this?

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