First time at commercial mediation?

The Victorian Small Business Commission arranges mediations between disputing landlords and tenants for premises that are subject to the Retail Leases Act 2003. Their offices and mediation rooms are at 100 Exhibition Street in the Melbourne CBD and the cost is $195 per party. They offer a mediation service also to non retail tenants under section 5 of the Small Business Commission Act 2017. I have not yet had an opportunity to attend a non retail mediation.  They also offer a rarely used facilitation service which is slightly different and applies when there are multiple parties to a dispute or the parties are deeply divided. It may be done in house at no cost or by an external facilitator which commands a different fee structure. A check of the V.S.B.C. website at  www.vsbc.vic.gov.au confirms an 80% success rate for the 1,000 approximate cases each year. It is a low cost dispute resolution service that takes about 4 – 6 weeks from application to the date of hearing. Once you are advised of the claim you are then advised who the mediator will be. The mediator is usually a solicitor or experienced mediator appointed by the V.S.B.C. who can assist the parties to resolve matters but cannot provide legal advice. Anything you say is without prejudice so by all means speak your mind as any statements are not admissible at V.C.A.T. if the matter is not resolved. It was not a practice in the past but now you will be asked to outline your side of the claim. This may help you to construct your argument before you attend. You are also able to examine the other parties claim to give you time to prepare a defence. Personally I am not always keen to outline my points of defence as I don’t want the mediator to form an opinion before the hearing.

For the mediations I have attended they have included compensation for loss, refusal to transfer a lease, disputes over the maintenance of buildings, refusal to amend or renew leases, supposed unconscionable terms and the like. The conduct of the mediations is such that the parties sit in a room opposite each other and present their various points of claim. In some instances either or both parties are legally represented however this is unusual in a low cost jurisdiction unless the stakes are high or a party may have a poor command of English for example. Once each side has put their case, you usually break and the mediator then spends time with the parties on an individual basis to examine the strong and weak arguments of each side.

 

The mediator will also point out the cost of litigation at V.C.A.T. if the matter is not resolved. This is often quoted as $10,000 per day per party when legally represented. Therefore most cases are resolved. The cases I have been involved with in the main are genuine. They are the result of long running disputes which highlight the need to get on top of problems early. Some cannot be helped however and the longer it drags on, the higher the compensation sought will be. There are always vexatious claimants too. For $195 they are hopeful of some sort of optimistic result usually without a working knowledge of the Act. Your case normally highlights these flaws and the mediator is always supportive when you act within the legislation. Most cases are resolved in 2 – 3 hours. Some have gone for over five hours and finished well into the evening. Allow yourself time for this. With regard to the terms of settlement, they are recorded for the parties to sign and are binding. It is not unusual for a tenant to start at a claim of say $50,000 to see that whittled down to $10,000 or below because they are not fully aware of the law or are not experienced enough to engage in brinkmanship and want to push the matter on to V.C.A.T. The mediator is also in their ear reminding them of the costs to go to V.C.A.T. Nonetheless, some of the cases do proceed to V.C.A.T. and we can enjoy reading the various decisions made at some else’s vast expense. A mediation can act as a sobering up experience for petty litigants as it involves considerable time and expense and thus sort out the genuine claimants. It can and does work when people are hard headed and a common sense negotiation earlier is rejected. By the time they arrive at the hearing they are usually over it rather than fired up. Once a mediation is settled, the parties usually reflect on their loss. One party is rarely the winner outright and compromise is the order of the day. If you dig you heels in and refuse to negotiate you will want to hope that your opponent is not up for the next round at V.C.A.T.

Having trouble collecting the rent?

This is a problem older than the pyramids which can lead to immense frustration and can be very time consuming. Threats and intimidation can be part of it and it can escalate to assault, criminal damage and beyond. A client recently sold their property as they were fed up with the tenant not paying on time so I will spend some time on this topic as it is the most critical item for a property manager to perform.  There are solutions to arrears and not all of them result in a loss for the landlord. It is worth reflecting on the type of problem tenant (and sometimes problem client) you often get based solely on their rent payments to assess the best course of action.

1.       The tenant pays but either on day 14 to avoid a notice to vacate being served or on day 30 to avoid re entry at the expiry of the period of notice. Eventually this will break as the tenant at some point will arrange their affairs to exit the property with minimal items on site owned by them of any value and usually a large reinstatement bill. You have little choice here but to pursue a process until the end. A lot of time will be spent and money lost.

2.       The tenant pays whenever they have funds which means they never pay early or on time and usually pay many weeks in arrears. It is up to the owner if they are happy with this arrangement. They can advise the agent to make a token gesture to get the tenant up to date or they can instruct the agent to put the tenant on notice that this cannot continue and impose interest and issue notices to vacate.

3.       You can get tenants that have had a good track record who experience business partnership disputes,  marital issues, illness or have experienced a major financial setback. You merely have to work with this and not let the arrears build up too far. It will either get better or it won’t. You and your client have to be the judge.

4.       There are a lot of tenants who should not be in business and how they actually make money is a mystery. I heard a speaker at a conference recently say that “it is a great time to get into business as barriers such as interest rates etc  are at historic lows. It is also a great time to go broke as it is easy to walk away and start up somewhere else”. I think this has been taken literally and is concerning. Inexperienced tenants that take months to obtain their permits and undertake fit outs are usually in trouble when funds start drying up. The same happens when a tenant purchases a business only to see it fail within the first 12 months. See my notes on lease transfers to further assess new tenants. You have to weigh up the likelihood of the tenant being successful or arrears will soon build up. If in doubt, say no at the beginning.

5.       The rent is too high.  Great if the tenant has the ability to pay or is not in a position to have a market based rent review but it can lead to the tenant struggling to pay on time. This one can be tricky as you do not want to lose the tenant if the rent is high and they have a good track record. I recently varied a lease to reduce the rent but extend the lease term to 10 years as a trade off. The rent can often be too high relative to the position, foot traffic and potential trade. This is why you often see a  café at the foot of an apartment building which is empty as the operator thought a second rate position could be overcome in a newish building with a high rent. Often the entire or a significant part of the fitout is left behind. The owner may have a win if the right operator comes along, otherwise it can be an albatross if the level of rent remains unchanged which caused the previous tenant to go broke in the first place.

6.       What sort of landlord are you acting for? With the growth in self managed super funds and an asset handover to the children of post World War Two migrants, a number of new and inexperienced investors have emerged. Some are commercial and some are not. If you have a realistic client then you can usually agree a course of action to minimise arrears. If you have a client that is sympathetic to the tenant's situation or the tenant has direct contact with them and wants to wedge you the agent, you walk a fine line. Same as the client who is sees things in black and white and cannot understand that rent is not always paid on time like their share dividend or bank interest is. Sometimes these clients listen to reason and sometimes they change agents, often frequently. None of this helps and you just have to go with it.

What are some of the remedies for arrears?

1.       Imposing interest on late rent payments. This can include outgoings if they are reimbursed to the landlord. In the 2016 R.E.I.V. lease, this is dealt with in clause 17 and is based on the penalty interest rate currently at 10% as of 1/2/2017. In the 2014 L.I.V. lease the relevant clause is 2.1.7 which then refers to the amount payable in schedule item 14. Often this is noted as 2% above the penalty rate. The imposition of interest is more of an irritant than a sure fire way to have payments made on time. A daily rate of $2.74 would apply to a monthly rent of $10,000 at 10% p.a. for example. Over the course of 12 months this can of course add up.

2.       Issuing a 14 day notice to vacate for arrears of rent and or outgoings. This is really the main instrument to effect payment or the lease can be terminated. For owners who do not want to lose their tenant no matter how poorly they perform, their instructions must be in writing. In the 2016 R.E.I.V. lease this is dealt with in clause 34. Clause 34.1 permits the landlord to re enter and terminate the lease on the basis of unpaid rent alone at any time without notice. This was an old provision of section 146 (12) of the Landlord and Tenant Act 1958. In my view this is cavalier and not without risk. Otherwise, a 14 day notice is required in which time the tenant must remedy the breach. In the 2014 L.I.V. lease this is dealt with in clause 7. In 7.3 a period of 14 days is listed as the time frame for a tenant to remedy any arrears. The respective leases also deal with the recovery of costs in connection with the notice issued which often run from $275 to $550 with an agent to $550 plus with a solicitor. Whilst the validity of the charge can often be questioned when the arrears are settled, note that it may not be recoverable if V.C.A.T. for example view the charge as a penalty. For many agents it is not unusual to issue several notices each month if the agency or clients have a no arrears policy.

3.       Making tenants pay by direct debit or bank transfer. This is often a condition in offers to lease and the lease schedule or special conditions that the tenant must allow the landlord to draw down on their account or pay by bank transfer to a nominated account on a set day each month. If this works and the tenant has funds in the bank then well and good. If the tenant has insufficient funds in the account or simply refuses to do so then it won’t work and I have not seen it enforced or listed as an essential term of a lease providing grounds for termination. You also cannot refuse a personal cheque as payment of rent unless a default has to be remedied at the 11^th hour and cleared funds are required.

4.       Not issuing a 14 day notice but instigating legal proceedings for recovery. If this is a retail tenancy under the Act then mediation has to occur firstly. If the matter is non retail then action may commence in the appropriate court based on the level of arrears sought. In my experience this would only occur when the company and or guarantors were of high net worth. This is rare and significant sums would have to be at stake. I have seen it occur when the loss of a substantial tenant would lead to prolonged vacancy or a large drop in rent. It also occurs when an anchor tenant in a retail centre for example seeks to break its lease or when the tenant is engaged in criminal activity and a warrant for possession is sought. With mum and dad type tenants this action often results in bankruptcy or unrealistic payment arrangements that never satisfy the debt. It is usual that the landlord is not the sole creditor and is unsecured if any assets such as property are sold by a trustee. This type of action is also not quick or inexpensive and time may have been better served if the lease was terminated and the premises relet as soon as possible. Sometimes a bond of three months rent is enough to end the tenancy and relet the space, thus avoiding further uncertainty and cost. As at January 2017 the Sheriff’s Office of Victoria had $1.8 billion in outstanding fines owed by 680,547 parties. The chances of having your ex tenant’s car wheel clamped at a Collingwood game or at the ski fields are remote.

5.       Appointment of debt collectors. This is a growing industry and I have tried various agencies but have not had any better luck than chasing the tenant on the phone myself.

6.       Chase, chase, chase. Like it or not, constantly demanding payment does get results. Letters of demand are a waste of time these days as SMS, email and phone calls are more productive. Tenants are less likely to ring for maintenance or other issues too if they owe money. Sometimes that is positive, sometimes not. The trick here is to maintain a working relationship but demand performance from the tenant and set boundaries. For example, if the rent and outgoings exceed say $5,000 at any point or exceed 30 days in arrears, make sure that the tenant knows you have instructions (after discussion with the landlord) to issue a 14 day notice to quit. Nothing should come as a surprise even though you are trying to work with the tenant.

This does not always work with tenants who are aggressive or have lost control of their circumstances.  Plain harassment does not work either and you would not put up with it yourself if the roles were reversed. Tenants can get fed up with harassment and pay you back in other ways by leaving negative comments on social media – not always a bad thing, complaints to your employer or contacting your client directly. You may end up being put to the bottom of the list for payments as far as the tenant is concerned so it can be a fine line to tread. You also need to know who you are dealing with. Some tenants can respond to more aggressive treatment but for others this does not work and as I mentioned above, you will be paid back in kind leading to frustration, anger and your client will be the poorer for it.

7.       In summary my suggestions to minimise arrears are as follows:

(a)    Constant communication, daily if deadlines are not met.

(b)   Proper invoicing.

(c)    Work at maintaining a rapport.

(d)   Set boundaries for payment.

(e)   Ensure the landlord is informed and provides written instructions if needed.

(f)     Act before it’s too late. Problems don’t fix themselves.

Commercial Condition Reports. Valuable or a waste of time?

Unlike residential condition reports which have been in use for many years and are needed if a dispute arises with a tenant, there is no requirement in the Victorian commercial leasing market. There is no standard report format, no reference to a report in any of the current commercial leases and no mention in any tenancy legislation. The standard form R.E.I.V. authority lists a condition report as a service requirement in the residential authority but not in the commercial one.

What happens at the end of a commercial lease if there is no condition report? That would depend on the terms of the lease. In the R.E.I.V. 2016 lease this is dealt with in clause 10 and the L.I.V. 2014 lease in clause 5. Both require the tenant to remove its fixtures and fittings and make good any damage. The R.E.I.V. lease requires the property to be returned to the condition as at the initial commencement date whereas the L.I.V. lease emphasises a clean condition. If the parties do not agree on the state of the premises then further action may be initiated in court or at V.C.A.T. All the more reason to have some sort of record.

What type of condition report should be used? That would depend on the type of property. A small shop would generally be satisfied with external and internal photos, a list of the owner fixtures and fittings and any general items that are a feature of the property such as fitout, air conditioning or those found in item 1.4 of a standard disclosure statement. Videos can be useful if the premises are substantial and there are companies that can prepare detailed condition reports on HVAC, electrical distribution, data cabling and the like if the intention is to have a corporate office for example returned to its original condition at lease end or if the tenant intends to make substantial alterations.

When would you not want to prepare a condition report? Often this is not needed if the premises were leased as a bare shell and is to be returned as such or the premises are in poor condition and agreement is made for the tenant to renovate. Be sure to amend the lease so that the tenant is not obliged to return the premises to its original condition if the landlord wants to retain the improvements made by the tenant. Often when a building is slated for demolition, there is no need to prepare a report however, as often occurs, the premises do not end up being demolished, are re-let and the tenant and landlord are in dispute over how the property was left. If a report is made, it can always be discarded if demolition proceeds.

When is a condition report useful other than at the end of a lease? Unlike residential properties, commercial properties are often modified by tenants such as new or amended fitouts, particularly food related. A condition report and subsequent recording of the changes after the tenant has moved in and refitted will assist tracking alterations to the premises. This could evolve over many years with the same or new tenants following the sale of a business.

In the residential context, a tenant acknowledges the state of the premises and a report is agreed to by both parties. It is up to the individual owner if they want to seek agreement from the tenant or merely keep a copy for their own records for commercial premises. I have had tenants ask for a condition report at the commencement of a lease but it is rare. Property owners also rarely ask for this unless a problem arises.

A thorough condition report can catch out changes that have been made without consent or where the tenant asserts on vacating the premises that the premises were taken in poor condition and that their changes actually constitute an improvement. That may or may not be the case. Undocumented changes without permits may actually be illegal and require expensive restoration. Landlord’s fixtures and fittings such as floor coverings are often contentious. Were they in good condition at commencement  and can the landlord prove it? Was there pre-existing damage or is it fair wear and tear? Without good photographic evidence the proof required may not exist, leading to dispute.

Condition reports may eventually find their way into standard leases or legislation but in the meantime a report with basic photos and a description of the state of the premises and fixtures and fittings should be on every agents file.

Would You Let A Tenant Insure Your Building?

No is the obvious answer, but it is worth looking at the obligations of both parties under the R.E.I.V. and Law Institute Leases and what they mean in practice.

With the R.E.I.V. 2016 Lease, the owner is allowed to recover insurances premiums under clause 2 (h) of the lease which is fairly encompassing. The landlord can pretty much insure whatever they like at whatever sum they see fit. The landlord is prevented from recovering insurance charges if the Retail Leases Act 2003 applies generally if it is not disclosed in a disclosure statement, covers part of a premises not used by a tenant, the calculation is not on a percentage of floor area and the like. The landlord also has an obligation to provide insurance details to a tenant under clause 21 if requested to do so. There is no requirement on the landlord to actually insure the building so after production of documents, the landlord could merely cancel the policy. This is unchanged from the 2003 version of the lease.

The tenant also has obligations to insure under clause 4 covering public risk, additional premiums by way of the tenant’s occupancy, claims excess payment and tenants fixtures and fittings. Whilst there is an obligation on a tenant to replace glass in clause 5.5 (f) interestingly, there is no obligation on the tenant to insure glass. The tenant is also not required to insure in the joint name with the landlord or note the landlord as an interested party.

With the Law Institute of Victoria 2014 Lease, the owner can recover insurance premiums under clause 1.1(d) and the type of cover is strictly defined and not as broad as the R.E.IV. lease. Public risk premiums are for $10 million as a default so ensure that schedule item 12 is for example $20 million. The same applies to Loss of Rent cover listed in schedule item 13. If you require a loss of rent period of say 18 – 24 months you need to make the appropriate insertion in the schedule as the lease has a default period of 12 months only. The owner has a further obligation to ensure that the  premises are insured under clause 6.2 during the term of the lease unlike the R.E.I.V. lease. The tenant also has obligations under clause 2.1.6 to pay any premium increase due to the basis of occupancy and to insure for public risk for an amount listed in the schedule (the same basis as the landlord noted above) but for not less than $10 million in clause 2.3. The landlord in this case must   be noted on the tenant’s policy. There is no requirement for the tenant to insure their fixtures fittings or stock. Clause 3.2.3 requires the tenant to replace any broken glass but there is no requirement for the tenant to insure glass. The tenant is also required to pay any claims excess under 1.1(d).

Some of the tenancy problems which are encountered with insurance (a topic in itself) include:

1. Under or over insurance. With under insurance the insurer applies averaging to the claim so the landlord will be well out of pocket. With over insurance, the tenant will pay excessive premiums. The lease has no mechanism to rectify either of the above situations although a retail lease may lead to a mediation to resolve the matter. Generally, if the tenant receives an invoice from the landlord which it considers to be excessive, quotes are sought from competing brokers and compared upon which the parties negotiate a settlement. Advice should be sought as policies can be a premium type or bare bones form of cover only and not always like for like. The sums insured are normally arrived at by a valuation if in dispute. You cannot take an educated guess when assessing the quantum of cover.
2. Glass cover is often a basis of dispute wherein the tenant who is paying the landlord’s insurance premium has an expectation that if the glass in the shopfront is damaged, that the landlord has glass cover. Landlords should always have cover to avoid this problem.
3. The noting of a landlord on the tenants policy is also problematic. Will the insurer actually cover the landlord in the event of a claim? The landlord is a third party, has not completed a proposal with the underwriter and may not be an insurable risk let alone that they have seen or read a copy of the policy noting the exclusions of cover.
4. Landlords who also demand copies of tenants insurances as a basis to sleep well at night are unrealistic. The landlord cannot contact the tenant’s insurer to see if a policy is up to date during the period of cover due to privacy legislation and there is nothing to stop the tenant cancelling the policy the day after production to the landlord.
5. Some landlords allow the tenant to take out the cover thinking they are doing the tenant a favour or if it is a large corporation, that the premium will be vastly cheaper. In the event of a substantial or total loss if proper cover is not in place the landlord may be bankrupted or face an appearance in the coroner’s court in several years time. Why would you risk that?
6. Something to consider, If you have just leased to a new tenant in a property that was hard to lease, the tenant is under resourced, a first timer, an extensive fit out is involved or the rent is high, consider loss of rent cover (not loss of income in the event of say a fire) for 12 or 18 months if the tenant gets in financial difficulty. If the tenant survives the first year or so of a new lease their chances of success are much higher and you may not renew the cover. Either way, If you have a large mortgage or are really going to rely on the income then without insurance you may put yourself in jeopardy. The premium is most likely recoverable anyway.

The golden rule is that each party must maintain and control their own insurance cover.

Transfer or Assignment of Lease: What can and should happen, and what to be aware of.

A transfer or assignment of lease normally occurs when the tenant seeks to sell their business or they wish to close or relocate their business and seek another tenant to take over the lease.
The tenant must seek approval in writing from the landlord to transfer the lease and generally the landlord cannot unreasonably withhold consent. The 2016 R.E.I.V. lease deals with lease transfers in clause 14 and in the L.I.V. Lease 2014 edition it is dealt with in section 4.

Each lease has particular clauses and conditions which must be checked when the request to transfer the lease is received. In the case of retail leases, section 60-62 of the Retail Leases Act 2003 deals with circumstances where the landlord can withhold consent as follows:

60. When the Landlord can withhold consent to an assignment -

(1) A landlord is only entitled to withhold consent to the assignment of a retail premises lease if one or more of the following applies -

(a) the proposed assignee proposes to use the retail premises in a way that is not permitted under the lease;
In the case of sub clause (a) the landlord is generally protected from a type of use which the landlord may object to such as a rival tenancy or unpalatable use.

(b) the landlord considers that the proposed assignee does not have sufficient financial resources or business experience to meet the obligations under the lease;
With sub clause (b) it is not unusual that the incoming tenant is inexperienced or does not have substantial cash reserves or significant assets. In cases such as this it is important to request a statement of assets and liabilities on the company and directors or the individual(s) if a company is not the proposed assignee. If the company or individual(s) own the property it is advisable to request a copy of a council rate notice (or conduct a title search) to ensure the owner is correctly listed. If other parties are listed on the rate notice who are not the proposed assignee, such as a spouse, in the event of default, the property can be transferred stamp duty free effectively out of reach or creditors.

References are also required, particularly rental references. This is a primary method of establishing if the tenant pays on time or has been difficult to deal with. Personal and trade references generally carry less weight. In order to assess the tenants' background it is not unusual to request a history of the tenant's experience. Have they owned and run businesses or managed them? Or, perhaps they have little industry experience.

Previously it was a requirement to provide a business plan, however it is not required under the Retail Leases Act 2003 now. Some tenants, however, will provide one as a bona fide display of their intentions.

In some instances the agent may request a credit report on the proposed assignee company and bankruptcy and other checks on the directors. Privacy consent needs to be obtained before a credit agency will process an application on individuals. ASIC also publish the names of people who are banned from being a company director and this can also be checked on the ASIC website.

If the items noted in (b) are positive then the transfer may be approved. If however they are not sufficient then there are some difficult decisions to be made. The landlord can refuse the transfer. The landlord can seek an increase on the security deposit or the provision of additional guarantors. It is unusual to vary the terms by consent such as the level of rent or outgoings. It is not unusual for assignees to seek additional lease options to preserve the value of goodwill and allow for the amortization of any refit costs.

(c) the proposed assignor has not complied with reasonable assignment provisions of the lease.
In the case of sub clause (c), for the assignor not to comply with reasonable assignment provisions this may extend to not providing a disclosure statement to the assignee, not providing adequate documentation to evidence the transfer, there may be an un-remedied default or condition not complied with such as an incomplete fit out and lack of permits.

(d) the assignment is in connection with a lease of retail premises that will continue to be used for the carrying on of an ongoing business and the proposed assignor has not provided the proposed assignee with business records for the previous 3 years or such shorter period as the proposed assignor has carried on business at the retail premises.
Finally, with sub clause (d) it can be difficult to establish that the assignor has provided business records to the assignees so it is important to seek confirmation from the proposed assignee in writing.
Section 61 of the Act outlines the information to be provided by a tenant to the proposed assignee and the landlord. Be aware of sub clause (5) wherein the landlord must provide an updated disclosure statement if requested to do so within 14 days of a request to do so or penalties apply. Sub clause (6)(b) also requires the landlord to accept or withhold consent within 28 days or receiving a request to assign. If the landlord fails to act within this time frame it may be that the transfer is deemed to have occurred.

Section 62 of the Retail Leases Act 2003 has the effect of releasing the tenant and guarantors as at the date of transfer provided a compliant disclosure statement has been issued. It is therefore important to have replacement guarantors in place or an increase in security bond. This release does generally not apply to a non retail lease and the lease should be checked to ensure that. It is also worth noting that a change of the permitted use for a retail tenant does not automatically release the assignor or guarantors. Protection for assignors and guarantors was intended only when a sale of the business occurred.

For a transfer to occur a transfer deed has to be prepared. This is usually prepared by the solicitor for the proposed assignee and is often in the L.I.V. format and is reviewed by the landlord's lawyers.

The landlord is able to recover reasonable costs in relation to expenses occurred by the managing agent and the landlords' solicitor in relation to the transfer. Occasionally, mortgage consent is required and the landlord must provide it although cannot recoup any costs under section 51 (1)(b) of the Act.

The vetting process does require suitable skill and experience to ensure that the landlord is overall in no worse position than before and that as much is known about the proposed assignee as possible.

The consequence of not managing the process correctly are arrears and vacancy or an unenforceable lease agreement. If not handled skilfully, the matter may also end up at mediation or VCAT so the correct advice must be sought from your property manager or solicitor.

Bank Guarantees - a quick guide.

A bank guarantee is a bankers undertaking to unconditionally pay the beneficiary the sum stated on the guarantee. This is similar to a bank cheque and is held by the landlord often for the duration of the tenancy. If you are about to replace a guarantee or have just leased a property and the lease demands that one be provided, what do you look for?

1. Read the lease. With Victorian leases in common use, clause 16 of the 2016 R.E.I.V. Lease outlines the requirements of the guarantee. 16.2 (a) provides that a guarantee must have no expiry date and 16.11 provides that it must be provided before handover. The L.I.V. 2014 Lease deals with guarantees in clause 13.
2. Make sure that the parties are correctly named along with their address and Australian Company Number. If possible try to avoid the landlord being a trust or ownership structure that may require substantial documentation to prove entitlement if the time comes to visit the bank and draw down on the guarantee.
3. Make sure that the sum payable is correct and if possible quote a gst inclusive figure in Australian dollars.
4. There should preferably be no expiry date. If a date has to be inserted, then aim for a date which is at least 3 months after the date following the expiry of the initial term and options combined.
5. Presentation of the guarantee cannot be conditional such as consent from the lessee or other hurdle being firstly required.
6. If the bank listed on the guarantee is not a local trading bank then you should check for a listing with the office of the Australian Prudential Regulator to establish that the bank holds an Australian banking licence. Thank you to Geoff Kliger from KCL Law for this suggestion.
7. If possible, try to obtain a guarantee with a stamp or signature in a colour other than with black ink as the original can easily be confused with a copy and can be very difficult to verify years later.

If in doubt, always read the respective clauses in both leases and any special conditions contained therein. If a guarantee is not provided before handover then insist on a cash bond to be exchanged upon production of an acceptable guarantee or simply do not hand over keys to the premises.

Remember that a bank guarantee generally has the added bonus of not being an asset of the lessee. In the event of the appointment of a tenant administrator, receiver or liquidator, a cash bond may have to be returned for distribution to creditors whereas a bank guarantee is beyond their reach.

Commercial Property Leasing ABCs

If you have not reviewed all of your vacant listings, you should act without delay or you will be looking over your shoulder. The start of a new year demands that all of the things you said you would do differently this year are now put into practice. Leasing can result in some of the best and lowest fees payable but all listings should be approached with the same enthusiasm. The best operators I have seen have done over 75 lettings in a year. Average ones 35 or less.

Your biggest draw card used to be the largest sign board you could fit on the building but now it’s the Elite Plus internet listing. Meeting anyone on site who rang up used to get results but time spent sitting in Melbourne traffic is time wasted and prospects need to be better qualified as you are working against the clock at all times. You also need to know as much about the property as you can upfront. Demand answers from the PM or landlord. If you are still asking questions after more than a month you will appear either as either lazy or a goose. Don’t be that guy.

1.   Photos.
Professional is best. Don’t have one photo of the shop with the old tenant's signage on there. Take lots of photos or better still, a video. Ensure it is clutter free and as bright as possible. Capture any views, historic features and high quality neighbours if they are there.

2.   Condition of the premises.
If work is needed, consult the landlord and PM. Damage should be repaired not left to the imagination of a new tenant to see beyond. The property should also be clean including windows and lawns mowed. Whilst the building is vacant it is the best time to attend to any general maintenance. Do stair rails, bollards or windows need painting? Exit lights that work and up to date fire equipment mean that the owner cares about the property. A run down building says to a tenant that nothing will change once they move in. Old signage should be painted out as well. Arrange for the power to be connected. You can’t inspect a property if it is in the dark!

3.   Advertising.
Signs are still good publicity for the agent and still pull enquiry. Install prominent and neat signage where you are able to. As for internet advertising, buy the best you can afford. Unless there are only a handful of listings in the suburb, a standard listing will see you off page 1 very quickly and once you are at page 3 or later you are wasting your time. You can get deals such as free enhancements and upgrades and you should consider these. The layout of the ad is also important. The caption which also applies to the signboard should be attention grabbing. “Fact / Warehouse” or “Shop or Office” are lazy. A caption is not easy but well worth the time spent. Borrow or reword headings that leading agents use if you must but avoid cliche. From time to time update the ad with a new caption or photo.

4.   Property features.
You need to highlight the key points. Avoid residential style War and Peace narratives. Often this is placed on an elevated board where you can barely make out the agent's number whilst driving by at speed, let alone discover that the property has two kitchen sinks. Highlight items such as position, size, condition of the premises, ideal user, key issues such as existing new fitout and car parking. Secondary features which can be included but do not need to paint the primary picture are air conditioning, amenities, signage, state of fitout, NABERS rating if over 1000m2 in the case of offices. Springing heights, roller door numbers, heights, hardstand, canopies, power capacity, sprinklers and proximity to ring roads in the case of industrial properties. Grease traps, frontage, neighbours, signage, canopies, permits, any fitout in situ in the case of retail premises. You need a floor plan, zoning, a car park plan, details of service contracts, all outgoings and anything else you would need if were leasing it for your own use.

5.   Price.
If it is still at last year’s price then consider reducing it. If you have just completed a mild renovation and there is no interest then increase the price. The market is not perfect and tenants are not valuers. You need to do something different if you are not getting enquiry. If you are seeking $52,000 p.a. for example, consider $49,500 as any internet search by a prospective tenant looking in the range $40,000 - $50,000 will now capture the listing.

6.   Client Liaison.
Once you have put the listing up on the net, if you don’t call the landlord for three weeks, there is something very wrong. The best agents can usually keep in touch with clients weekly or daily if they have a hot prospect or an offer. Average agents struggle to keep in touch at least once weekly even if it is only via a brief email. Only you can decide which one you are. No landlord trying to lease their property ever said they were sick of the agent ringing all the time. Conversely, the landlord who rings every day or several times a day will make the agent as anxious as they are but will rarely achieve a better result.

Beware! A hidden trap in the 2016 R.E.I.V. Lease.

The R.E.I.V recently updated their standard commercial lease which was basically unchanged from 2003. Whilst there are several changes to the new document, one in particular needs to be considered carefully. It concerns the requirement of a tenant to give notice to vacate once the lease is three months from its expiry or has expired and has continued on a monthly basis.

Clause 22 of the lease states “If the tenant does not have an option to renew this lease for a further term or if having an option to renew does not exercise it in the required manner, then if at least 3 months before the term expires, unless otherwise agreed in writing” : sub clause 22.1 (v) states “ the landlord or the tenant may end the tenancy at any time by giving three months prior written notice”.

This clause is intended to compel a tenant who does not take up an option or is uncertain of their intentions, that they must give 3 months written notice and afford the landlord some time to relet the property. Previously, the lease only provided for one months notice in writing by either party.

At first glance this appears to be a win for the landlord. In practice it may not as it can create the following problems:

1. The tenant is not likely to have read the lease and when advised will be in a state of disbelief.
2. The tenant may claim that the clause is unconscionable and therefore unenforceable. A claim against the landlord may then ensue or an offset is sought.
3. If the landlord had intended to rely on this clause then a tenant may claim it should have informed the tenant 3 months out from the expiry of the lease or when the option renewal notice (if any) was issued.
4. The tenant may simply vacate after one months notice and refuse to pay any further. Unless the security deposit is substantial, losses will be incurred.

For landlords and agents this could be the end of what was a good relationship with the tenant, legal
action and loss of reputation.

This is not the end of the matter. The leasing agent appointed may be unaware of the notice provision and proceeds to lease the property assuming wrongly that one months notice is all that is required once a replacement tenant is secured. The sitting tenant may then turnaround and advise the agent upon receipt of notice that they need to give 3 months notice. The new lease with a new tenant is then not capable of performance and the agent and landlord risk being sued by, compensating or losing the new tenant.

How do agents and landlords protect themselves?
The following procedures are suggested:

1. When a property is first leased, if this clause is intended to be relied upon then include it in the conditions of the offer to lease. Then there is no doubt as to the intentions of the parties.
2. Consider reminding tenants of this clause in written communication concerning the exercise of option or intention to renew.
3. Ensure that the offer to lease and the lease itself with the incoming tenant includes a clause to the effect that the lease is subject to the existing tenant vacating the premises and that the landlord will not be responsible for any compensation arising.
4. Delete the clause from the lease.
5. Agree in writing a date on which the premises will be vacant up front with the sitting tenant.
6. Agents and landlords should read the existing tenant’s lease at the start of the leasing campaign.