Keeping our clients informed is important to us so we regularly publish our thoughts on topics that will be of interest to anyone involved with commercial property. We call them ‘insights’ and we hope you find them of interest.
CPI% v Fixed 3%
At The Lease Bureau we see the results of a lot of lease negotiations and lately we’ve noticed a trend towards fixed percentage Rent reviews as opposed to the traditional CPI % review.
So, we did some number crunching to compare the outcome based on the last 10 years figures.
I found the outcome interesting and I’m sure you will as well.
We assumed an initial annual Rent of $30,000 in 2009 and using the March Quarter CPI, here’s how it looks: -
Although it doesn’t look like much of a difference, consider this.
If we assume an 8% Yield, this means that a Property that was worth $375,000 in 2009 has gone up in value in 2019 to: -
$459,662 (using a CPI% Review method)
$503,963 (using a Fixed 3% Review method).
Quite a difference really.
As always if you have any questions, please give me a call.
To the Landlord
(Do not show this to your Monthly Tenants!)
How would you like your new tenant to stay in your Premises for the next five years at the same pitifully low Rent that you have just negotiated (no Rent Reviews) without any obligation to insure against public risk, not having to worry about looking after your property, not bothering to fix any damage they caused, not worrying about painting when they leave and knowing that they have the law on their side.
If so, here’s how you do it!
- Agree to allow a tenant to occupy retail Premises but do not sign a Lease, just accept it when they say that they want to see how it goes first.
- Accept their Rent on a monthly basis for at least six months.
- On the first day of the seventh month (this is the good bit) smile when they say to you that they intend to stay for the next four and a half years (they do not even have to say it then; they can simply refer you to Section 17 of the Retail and Commercial Leases Act if you try to increase the Rent or throw them out!).
Unfortunately, the Act does not say anything about what a magistrate might decide to include in any Lease that is created by Section 17 but is it worth taking the risk?
What to do?
If you have a tenant on a monthly tenancy, you must negotiate a formal written Lease agreement which sets out all of the obligations and normal details you would expect in a Lease
You can get the Tenant to obtain a solicitor’s certificate
You can hope that the tenant does not decide to exercise their rights
You can wait and see what happens when you try to increase the Rent and you end up having to fight the matter in the Magistrate’s court
You can stick your head in the sand (but remember which bit that leaves up in the air and exposed!).
Default Interest on late Rent payments
Any good Lease should provide that the Landlord can charge interest on any monies that are in arrears.
Commonly known as Default Interest, our Leases provide that once any monies are more than 7 days in arrears, the Landlord is entitled to charge Default Interest on all of the amount owing (including GST) at the rate of 2% per annum above the Commonwealth Bank Overdraft rate and that this starts from the day the monies became due, (not 7 days after they were due).
Here is a simple example and a formula that you can follow.
Let’s say that the Monthly Rent is $2,200 (plus GST) each month (a total of $2,420) and the overdraft rate is 9.5% and the Tenant is 12 days late.
The calculation is as follows: -
12 (Days late) divided by 365
multiplied by 11.5% (2% above the overdraft rate)
multiplied by $2,420 (the amount due)
which gives a total Default Interest of $9.15 for the 12 days overdue period.
If the Rent is still not paid going forward, you can repeat this calculation daily, weekly or monthly until your invoice is paid. Obviously, the ‘Days late’ figure and the ‘Amount Due’ will change over time.
I’m sure some of you will be a bit confused with this, so please feel free to give me a call if you need a bit of help.
REGISTRATION - How we approach it.
Tenants often get very excited about getting their Lease registered on the Title to the Land, especially in the early stages of their relationship. However, when the reality of the quite substantial costs involved hit home, they often decide not to proceed.
With this in mind, we have developed a process over the years that goes like this.
- Firstly, we ensure that the Lease we prepared is fully signed and executed by all parties so that it is legally enforceable
- If the Tenant requests Registration, we work out the costs involved and send an invoice
- Once payment is received, we then: -
- - Arrange preparation of a plan (if one is necessary)
- - Prepare and print the Land Titles Office panel form
- - Forward the documents to any Mortgagee for their consent
- - Obtain search copies of the Certificate of Title, search ASIC records to obtain Company information and details of Company Directors.
- - Undertake the Verification of Identity process with you, the Landlord
- - Complete the page numbering and other technical requirements of the Land Titles Office
- - Forward the document to the Tenants Solicitors or Conveyancers for them to provide their Certification
- - Provide our own Certifications on behalf of the Landlord
- - Pay the fees and lodge the document in the Land Titles Office
- - Follow up with the Land Titles Office and attend to any requisitions
- - Once confirmation of Registration is received, we distribute the Lease documents to all parties.
All of this takes time but because the Lease is legally enforceable from the moment it is fully signed, the parties can relax and simply wait until the process is complete. This way it saves a lot of stress for everyone.
As always if you have any questions, please let me know.
A Business name as Lessee ?
Often we receive instructions to prepare a Lease where the Lessee (Tenant) is shown as a Business Name. Many small business owners identify closely with their Business name and want it to be displayed prominently everywhere possible. Unfortunately, this often extends to asking that the Lease be prepared in the Business Name.
This is not possible. A Lease creates an ‘interest in Land’ and (with the occasional rare exception) there are only two entities that can legally hold an ‘interest in Land’. They are: -
1)an individual; or
2)a Pty Ltd Company.
So when a prospective Lessee says that they want the Lease to be in the name of their Business, you probably need to dig a little deeper and explain that a Lease cannot be in a business name and ask whether they want it in their name as an individual or perhaps a Pty Ltd Company if they have one. It may turn out that the Company name is the same as their Business name but this is not generally the case.
If they say that they want the Lease in a Company name, obviously the issue of the Directors Personally Guaranteeing the obligations of the Lessee needs to be addressed.
In this Lease Insight, I want to reproduce a letter that I wrote a while ago in response to a Landlords question about who was responsible for replacing a broken window in the hope it may help you answer the same question in the future.
Referring to your query about the broken window, I will set out below how things work.
Firstly Clause 8/10 of our Standard Terms and Conditions states very clearly that the Tenant must replace any broken glass in the area they lease. This is irrespective of how it got broken and whether or not the Tenant has insurance that they can make a claim on.
Secondly the panel headed “Lessees Insurances” in the schedule of your particular Lease clearly states that the Tenant must take out “Plate glass Insurance (Including Burglary damage).
The reason that most Landlords insist that the Tenant have insurance is that Plate Glass is often expensive to replace and if the Tenant doesn’t have insurance, they are often loath to spend the money required to replace the broken glass and also such an unexpected expense can affect their ability to pay Rent.
The only other consideration is if the glass was in a common area, then generally the Landlord would have Insurance that would cover his cost of replacing the glass.
I hope this clarifies things.
LICENCE OR LEASE?
When a landlord wants to give a tenant a right to occupy commercial premises, it can be tempting to try and avoid the restrictions placed on lease provisions by the Retail and Commercial Leases Act by simply granting a ‘Licence’ instead of a ‘Lease’.
However, doing so is fraught with danger in that the Courts have said on a number of occasions that it is not what you call the document, it is the substance of the agreement as well as the true nature of the relationship between the parties that is critical in deciding if it is a Lease or a Licence.
What this means is that even if the agreement between the parties was negotiated on the basis that the Act wouldn’t apply, there is every chance that the Courts would find in fact that the parties had entered into a ‘Lease’ and all of the protections that the tenant is given under the Act would apply.
For example, the landlord may think that as the Licence was only for one year, that he could terminate the arrangement at the end of that year. Not so if its found to be a Lease.
He probably didn’t give any thought to rent reviews either and when the Courts extend the Lease for 5 years (which is allowed for under the Act) he is stuck with the same rent for the entire period.
From the tenant’s point of view, why would he enter into a Licence in the first place as it can’t be transferred as it is personal to him, it can’t give him exclusive possession (because then it would most likely be a Lease), it can be terminated by the landlord and the landlord can enter onto the property at any time and can even grant Licences to other parties to use the property.
So, the main take away points are:
-If the tenant wants exclusive possession, it must be a Lease
-If the tenant wants to be able to transfer or otherwise deal with his right to occupy, it must be a Lease
-If the tenant wants protection in the event that the ownership of the land changes, then it must be a Lease
-If the parties want certainty in the eyes of the Law, it must be a Lease
However, if both parties require a casual relationship, albeit one that is documented, for a part of a property on a short-term basis without exclusive possession and they are sure that it won’t be interpreted by the Courts as a Lease, then a Licence is the way to go - which is why you don’t come across too many of them.
Varying the terms of a current Lease
A Lease is a document that sets out the terms of an agreement between two parties and locks them into that agreement for a period of time. Sometimes the parties later decide that they want to change the terms of that agreement.
So how do we go about locking in place the newly agreed terms?
The first option is that we prepare a brand-new Lease and surrender the old one. This involves considerable cost which most people want to avoid, so we needed to find an alternative.
Knowing that extending a Lease creates a new Lease in the eyes of the Law allows us to simply extend an existing Lease for a period of one day, set out the newly agreed terms in that document and once everyone had signed it, that extension would have the same effect as a new Lease.
So, if you need to lock in newly agreed terms, we can do this for you using this much cheaper method.
Should I charge my tenant GST on Outgoings?
This is still a frequently asked question and the reason is probably that the actual answer (which is YES) doesn’t make much sense.
In a nutshell here is how it works - Not long after the introduction of the GST the Australian Taxation Office issued a “Determination” called GSTD 2000/10 that said in effect that any outgoings or other services that the landlord claimed back from the tenant were to be included in what the landlord “supplied” to the tenant.
As we know GST is payable by the landlord to the ATO on the total value of the “supply”. In other words, the landlord (assuming he is registered for GST purposes) must add up the rent, outgoings and other services that he supplies to the tenant (and that he gets reimbursed for) and send 1/11th of that amount to the ATO when he does his BAS return.
Where it stops making sense is that there is no GST included in some outgoings such as rates and taxes, but the landlord still has to remit 1/11th of the total amount to the ATO.
The same rule applies even if the tenant pays the rates directly to the levying body (ie local council, SA Water, ETSA). Technically, the value of those outgoings will be added to the value of the “supply” and the ATO will want 1/11th paid to it by the landlord.
In reality a lot of landlords and tenants close their eyes and pretend these tax rules don’t exist. That approach works well UNTIL the ATO comes knocking.