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.