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.
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.
Why Would You Give a Tenant a Right of Renewal?
When considering this question, we need to be aware of the following:
1.A right of renewal is a tenant’s right – not a landlord’s – in other words if the tenant wants the extra time the landlord can’t refuse (subject to a few things which we will cover another time).
2.There is no benefit to a landlord in granting a right of renewal other than getting a tenant to commit to the initial term of the lease.
3.The law says that a new tenant must be given the right to stay in the premises for a minimum of five years (this doesn’t apply to existing tenants and to certain types of tenants such as Government departments, listed companies etc.).
4.There is no automatic market review at the point of renewal. If you as a landlord want a market review it must have been negotiated at the time of entering into the agreement and must be stated in the lease.
5.If there is to be market review at the point of renewal, the tenant can demand that they be advised of what the new rent will be before committing to the extra time. This often involves a valuer which costs time and money and leaves the landlord in limbo waiting on the tenant to make a decision.
6.A tenant has the right to transfer their lease to someone else at any time during the term.
Now having said all that, I fully appreciate that some tenants are unwilling to commit for a fixed period of say, five years, but my belief is that this is simply a mindset that has developed over time and as the law now gives the tenant the right to transfer their lease to someone else (subject to a landlord agreeing but with very limited reasons for refusing) we should review this mindset.
Maybe landlords and their agents should start to think more along the lines of only granting leases for fixed periods of five years minimum and not including a right of renewal. After all, if a tenant really needs to move on, they can always find someone to take over and transfer their lease to them.
Mind you, I’m not complaining as extensions of leases make up a large proportion of our work but as someone who constantly sees instructions to prepare leases for 1+1+1+1+1 or more commonly 2 + 2 + 1, I do wonder if this is really necessary. Do these tenants only stay in the same premises for 1 or 2 years? I doubt it.
Sometimes I think we sell ourselves short as landlords and give rights of renewal too freely without trying hard enough to negotiate a fixed term lease.
Food for thought.
Of all the equipment generally classed as “Landlord’s plant”, these seem to cause the most problems. Generally, the issues revolve around responsibility for maintenance and replacement costs.
So here is what we know:
-our Leases provide that the air conditioner is the property of the Landlord (unless stated otherwise);
-the Landlord can choose to be responsible for servicing and maintaining the air conditioner and pass the costs on to the Tenant (except for capital costs);
-the Landlord can choose to pass the responsibility for arranging servicing and maintenance on to the Tenant.
Most of the problems seem to arise when air conditioners have not been serviced or maintained regularly or have just got so old that they have stopped working.
Generally, the reason that they have not been serviced or maintained properly is that the Landlord has left it up to the Tenant who has not done it, for whatever reason.
One solution is that, as a Landlord, you take responsibility for arranging the maintenance with a reputable company and then pass the cost on to the Tenant. Don’t just leave it up to the Tenant and hope they do it.
What if it just dies completely?
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).
Don’t know what a “capital cost” is? You need to talk to your accountant.
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.
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.
RECEIVE INSIGHTS TO YOUR INBOX
- Post Covid Rent Reviews
- Changes to the Retail and Commercial Leases Act - July 2020
- Code of Conduct "Leasing Principles"
- Why would you give a tenant a Right of Renewal?
- Air Conditioners
- CPI% v 3% fixed increases
- Monthly Tenancies - BEWARE
- Default Interest on late Rent payments
- Registration - How we approach it
- A Business name as Lessee?