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.
A question we often get asked is whether a Landlord can pass the cost of Land Tax on to a Tenant as an outgoing in a Lease?
Our answer -
The Retail and Commercial Leases Act contains in Section 30 a specific prohibition on Landlords passing on the cost of Land Tax to a Tenant.
However, there are some situations where the Act and therefore Section 30 does not apply.
Briefly, they are:
-if the Rent exceeds $400,000.00 per annum (exclusive of GST)
-if the Tenant is a public company
-if the Tenant is an insurance company
-if the Tenant is a District council
-if the Lease was prepared prior to 1990
-if the premises are used for a purpose that means the Act does not apply.
So, if your situation happens to be one of the very few where the Act doesn't apply then you can include Land Tax as an outgoing, provided of course that the Tenant is willing to accept it.
As always if you have any questions, please let me know.
I was re-reading the Retail and Commercial Leases Act the other day and came across Section 41. This Section deals with Landlords attempting to restrict who their Tenant employs as part of a lease. I have to say that this is not something I had ever considered before, but there you go.
The Act makes it clear that a Landlord who leases a retail shop to a Tenant cannot set out within a lease who the Tenant can and cannot employ. The Landlord can, however, set out within the lease, minimum standards of behavior for a shop’s employees. Additionally, the lease can require the Tenant to comply with particular industrial awards or agreements that effect the Shopping Centre the shop is located in.
It turns out that this restriction has always existed. When the Bill, which later became theRetail and Commercial Leases Act, was proposed in 1994, the Section was already in there. I’m not really sure what prompted the legislators to include this provision, but I guess the law is still capable of surprising all of us occasionally.
As always if you have any questions on Lease matters or other Conveyancing issues, please feel free to contact us.
Merging with Eastern Conveyancing
The Lease Bureau team is proud to announce that we are merging with Eastern Conveyancing, a leading provider of metropolitan and rural conveyancing for both residential and commercial properties.
This venture with Eastern Conveyancing, based in Marden, further strengthens our position in the property market while maintaining our individual core services. We will continue to trade under our current business names and are each committed to looking after our existing clients with the same high level of care and competence you’ve always known.
Director Sue Andriani established Eastern Conveyancing in 2016, and with over 20 years of experience, is able to assist clients with any conveyancing transaction, including both residential and commercial property settlements, land divisions, deceased estates, family transfers, business transactions and more. Eastern Conveyancing take pride in their customer service and are always up to date with the latest industry developments and technologies to ensure their clients receive the highest level of service.
Established in 1987, The Lease Bureau will continue to provide professional, legally binding lease documents for commercial properties, specialising in shops, offices, warehouses and shopping centres.
We are excited to team up with Sue and The Eastern Conveyancing team, taking advantage of this unique opportunity to extend further into the conveyancing market, utilising our combined skills and always friendly service.
In Part 1 we left it at the point where we asked what steps a landlord could take in order to be able to walk away completely and not have any residual liability in relation to an existing Lease at the time of sale.
Well, here is the answer.
It’s called a Lessor’s Assignment Deed and as well as passing all the contractual benefits of the Lease to the new owner, it will ensure that the new owner promises to fulfill all the obligations of the landlord under the Lease. This means that if something happens and the tenant does sue, you can happily sit back and let the lawyers slug it out.
The problem that we often encounter is that as most landlords and Agents are not aware that this document needs to be done prior to settlement, they don’t include a special condition in the contract setting out that the parties agree to enter into the Deed and also setting out who pays the costs of approx. $660 and as a result no Deed is entered into which means that the old owner remains liable.
So, if in the future, you are about to enter into a contract for the sale of a commercial property that has a Lease in place, give us a quick call and we will email you or your Agent, the appropriate special condition to include in the contract so that you can walk away completely after settlement and not have to worry.
As always, if you have any questions, please give me a call.
In order to adequately cover this important topic, we will present it in two parts, one week apart.
Here is the first part.
One of the most common misconceptions of commercial property landlords and their agents is that once settlement has taken place and the sale of a commercial property is complete, the old owner can walk away without any continuing liability. Well, that is not the case if they granted the tenant a Lease that is still current.
A Lease creates two types of rights. Firstly, what we can call ‘Property Rights’ which move with the land ownership. In other words, the new owner automatically steps into the shoes of the Lessor once they are registered as the owner on the title to the property.
The second type of rights are ‘Contractual Rights’. These don’t move with the title to the land and continue for as long as the Lease is in place.
In effect when you and the tenant signed the Lease you created a binding contract for the entire term of the Lease and even though you may have sold the property, you are still liable under the terms of that contract.
One of basic terms of all leases is that the landlord gives the tenant ‘Quiet Possession’ which means that they can use the property without interruption.
But what if the new owner decides to throw the tenant out? Which he can do – after all he did not sign a contract (Lease) with the tenant. In that case the tenant is likely to sue you, even though you no long own the property.
So, what can you do as a landlord contemplating selling a commercial property that has a Lease in place to ensure that you are in the clear after settlement?
Well, you will just have to wait for Part 2 for the answer.
It seems this is the mantra the State Government has now taken regarding the protections given to commercial tenants for Covid-19. As of 4 January 2021, these protections no longer apply.
As you may remember from some of my previous Lease Insights, the landlord was restricted from, amongst other things, acting under the terms of the lease to re-enter and take back possession of the premises and/or terminate the lease.
What this means is that if you have a tenant that has been refusing to pay rent because they have been affected by the pandemic, you can now act as per your lease.
However, currently the law does not address whether you can take action to recover any rent that has been unpaid by the tenant prior to 4 January 21. If you are owed a substantial amount from that period it would be best for you to have a chat with a solicitor who can let you know what can be done. Hopefully, the Government can create a comprehensive answer to this issue soon.
Summer is on the way and that means hot days when the tenant will turn on the air conditioner, possibly for the first time in many months. What if it doesn’t work?
Of all the equipment generally classed as “Landlord’s plant”, air conditioners seem to cause the most problems. Generally, the issues revolve around responsibility for maintenance and replacement costs.
What if it has just died completely through no fault of the tenants?
If it was working when the Tenant moved in, then they are entitled to expect that the Premises will continue to be supplied with a working air conditioner. In this case the Landlord has no option but to replace it. And the Landlord cannot pass the cost on to the Tenant (the Retail and Commercial Leases Act specifically stops you passing on “capital” costs).
If you don’t know what a “capital cost” is you probably need to talk to your accountant, but they are generally thought of as fixed, one-time expenses incurred when purchasing plant and equipment.
Obviously, if the Landlord and the Tenant have agreed on something different to the above, we can put it in the Lease as a special condition. However, we cannot override the Act even if both parties agree.
As always if you have any questions, please let me know.
One of the benefits of having been in the industry for many years is that you get an historical perspective on various matters. When I first started preparing Lease documents nearly 40 years ago it was common to specify that the rent would be reviewed to the higher of market, a fixed percentage, or CPI. There was also commonly a provision that the rent would never decrease. This was probably why it became common for a market review to be undertaken at the time of renewal.
Since those days of course the Act has come in and we can no longer put a floor under the rent and a market review has become a true market review in that it can take the rent down as well as up. Knowing that and assuming that post Covid, the commercial property market will take quite a while to recover which will in turn put a fair amount of pressure on rents to go down due to there being a greater supply than demand, I wonder whether it would be wise to get rid of market reviews for the foreseeable future.
Certainly, I have never understood the logic behind continuing the practice of automatically including a market review at the point of renewal. Which is why at The Lease Bureau we have always ensured that we specify the exact method of review for each of the potential years of the term and any renewal period. This ensures that the parties have actually given the rent review methods some thought.
A lot of Leases that we see from other firms, have an automatic market review included in the fine print at the time of renewal. Personally, I think that is potentially dangerous in that you might find that the rent goes backwards.
If you really believe that a market review will increase your rent, then it would make much more sense to me to include a market review during the term when the tenant doesn't have the option of saying that because they don't like that amount of rent, they are not going to renew the Lease.
Something to consider in the post COVID-19 world.
As always if you have any questions, please let me know.
Just when we are finally getting on top of the havoc that COVID-19 brought to the industry we now have some more changes to deal with. But this time it's mostly good news.
On the 1st of July 2020, the amendments to the Act come into force. Whilst there are several changes, the main ones that affect us are as follows
-Security bonds can now be up to the equivalent of three months’ rent
-There is no automatic right to a 5 year term where the tenant holds over from an earlier Lease
-There is no need to provide a Disclosure Statement at the time of renewal
-The Act does not apply where the rent (not including GST) exceeds $400,000
-There is now a new obligation to provide a tenant with a brochure that has been put out by the office of the Small Business Commissioner which details in 20 pages everything that a tenant would want to know before entering into a lease.
This last one is the only additional requirement in that a new tenant must now be given
1) A copy of the proposed Lease
2)A Disclosure Statement
3)A 20-page colour brochure that spells out a large amount of information that maybe useful to some tenants but probably won't be read by many of them.
Anyway, these are the new rules, so we need to get used to them and learn to live with them as large penalties apply if we don't provide all of the above to every perspective new tenant.
Don’t we just love more paperwork!!
In negotiation and enacting appropriate temporary arrangements under this Code, the following leasing principles should be applied as soon as practicable on a case-by-case basis:
- 1.Landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- 2.Tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under this Code. Material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code.
- 3.Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.
- 4.Rental waivers must constitute no less than 50% of the total reduction in rent payable under principle #3 above over the COVID-19 pandemic period and should constitute a greater proportion of the total reduction in rent payable in cases where failure to do so would compromise the tenant’s capacity to fulfil their ongoing obligations under the lease agreement. Regard must also be had to the Landlord’s financial ability to provide such additional waivers. Tenants may waive the requirement for a 50% minimum waiver by agreements.
- 5.Payment of rental deferrals by the tenant must be amortised over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- 6.Any reduction in statutory changes (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
- 7.A landlord should seek to share any benefit it receives due to deferral of loan payments, provided by a financial institution as part of the Australian Bankers Association’s COVID-19 response, or any other case-by-case deferral of loan repayments offered to other Landlords, with the tenant in a proportionate manner.
- 8.Landlords should where appropriate seek to waive recovery of any other expense (or outgoing payable) by a tenant, unless lease terms, during the period the tenant is not able to trade. Landlords reserve the right to reduce services as required in such circumstances.
- 9.If negotiated arrangements under this Code necessitate repayment, this should occur over an extended period in order to avoid placing an undue financial burden on the tenant. No repayment should commence until the earlier of the COVID-19 pandemic ending (as defined by the Australian Government) or the existing lease expiring, and taking into account a reasonable subsequent recovery period.
- 10.No fees, interest or other charges should be applied with respect to rent waived in principles #3 and #4 above and no fees, charges nor punitive interest may be charged on deferrals in principles #3, #4 and #5 above.
- 11.Landlords must not draw on a tenant’s security for the non-payment of rent (be this a cash bond, bank guarantee or personal guarantee) during the period of the COVID-19 pandemic and/or a reasonable subsequent recovery period.
- 12.The tenant should be provided with an opportunity to extend its lease for an equivalent period of the rent waiver and/or deferral period outlined in item #2 above. This is intended to provide the tenant additional time to trade, on existing lease terms, during the recovery period after COVID-19 pandemic concludes.
- 13.Landlords agree to freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.
- 14.Landlords may not apply any prohibition on levy and penalties if tenants reduce opening hours or cease to trade due to the COVID-19 pandemic.
RECEIVE INSIGHTS TO YOUR INBOX
- Land Tax
- Can I restrict who my Tenant employs?
- We are merging with Eastern Conveyancing
- Selling a commercial property - Part 2
- Selling a commercial property - Part 1
- End of Tenant Covid Protections
- Air conditioners
- Post Covid Rent Reviews
- Changes to the Retail and Commercial Leases Act - July 2020
- Code of Conduct "Leasing Principles"