Your stress free guide to leasing commercial property.

 Thinking about leasing a shop, office or factory and not sure what the process is?

Here are the 10 steps you need to follow:

1.       What building will suit my business?

2.      How do I find properties?

3.      Arrange an inspection.

4.      Making an offer.

5.      Acceptance and deposit.

6.      Leases and Disclosure statements.

7.      Before lease commencement.

8.      Key handover.

9.      Traps.

10.  Grand opening. 

If you follow these you will hopefully achieve your goal of securing the right leasing package for the right property. We want to encourage you whether you are just  starting out in your business or leasing something larger or a second or third building. The 10 steps are discussed in more detail below. 

1.      What building will suit my business?

a.      What location, size and budget do you have in mind?

b.      Do you need certain features such as a wide frontage, a particular zoning, parking and access, exposure, building height, power or gas supply.

c.       You need to have a shortlist to avoid wasting time looking at the wrong property.

d.      Are you after a short 1 – 2 year or a longer 5 year lease?

2.      How do I find properties?

There are several ways of doing this.

a.      Word of mouth. Someone tells you that a building is soon to become available.

b.      A search of internet sites such as:

https://www.realcommercial.com.au/

https://www.commercialrealestate.com.au/

https://www.commercialview.com.au/

or agent web sites such as ours.

c.       Agents Signboards

d.      Contacting agents directly.

3.      Arrange an inspection and weigh up the options.

Simply make a mutually convenient time after establishing that the property suits your criteria and then weigh up the following:

l Are there features that you need on site such as NBN, air conditioning, grease traps, 3 phase power, gas, parking and access that may not be evident at the inspection?

l What work is required (if needed) to suit your needs? You may need to bring through consultants to price this.

l Are there any council or other permit issues?

l When is the property available?

l Will this property suit my customers?

4.            Making an offer.

If the property is suitable we will give you an indication of the terms on offer. If that is attractive, we will provide you with a letter of offer also known as a Heads of Agreement (H.O.A.) covering the broad terms. If the lease is a retail lease as defined by the Retail Leases Act 2003 we will also provide a copy of the proposed lease, usually a 2014 Law Institute of Victoria or 2016 R.E.I.V. format and tenant fact sheet which you can find here: https://www.vsbc.vic.gov.au/wp-content/uploads/2018/10/vsbc-retail-leases-brochure.pdf This is useful even if you are not a retail tenant. Once you have received an offer to lease, obviously you need to read it and familiarize yourself with the terms. Many prospective tenants also take the opportunity to speak to a friend or relative or even a solicitor familiar with the process to ensure everything is recorded correctly. If you have any questions or need something clarified, now is the time to do it. The agent will then answer any questions and amend the offer if needed.

5.      Acceptance of the offer and payment of a deposit.

This is done when the offer is made and is normally two months rent and gst where applicable. Provided there is no last minute adjustment and the offer put is in line with earlier discussions, the landlord counter signs the offer and the lease and disclosure statement are prepared and issued.

6.      Leases and disclosure statements.

Leases and disclosures statements normally take from 2 – 14 days to prepare. The disclosure statement is a list of items some of which are in the lease such as the lease term and options and rent reviews but specifically list outgoings payable, fitout requirements, fixtures and fittings, special conditions and the like. Once you receive this you need to read it again to check that the items agreed to in the offer to lease are included. Now is not the time to see an advisor for the first time. If you have had advice initially, you should return to that person if need be and makes sure everything is clear in the documentation.

7.      Before lease commencement there are items to be attended to.

During this time you need to attend to the following:

a.      Sign and return the leases for the landlord to sign and include a signed and dated disclosure statement.

b.      Arrange to connect services such as gas, power and internet.

c.       Book any removalists.

d.      Organise any final inspections with contractors for fit out and signage.

e.      Apply for any permits or owners corporation approval needed.

f.        Pay the security deposit and or provide the bank guarantee.

8.      Key handover.

This is done on the commencement day of the lease provided items 7. a and f. above have been completed. Make sure you record the keys, pass cards and any remotes for doors including car parks, air conditioners or security alarms. You should also take photographs as a record of handover and send these to the agent. Whilst it is recommended that you change the locks for your own security, make sure you ask in case they are restricted keys.

9.      Traps to be aware of.

Sometimes things go wrong. Parties get cold feet, have acted in haste, do not realize the time and financial commitment involved or have simply not done their homework. To avoid this you need to get advice when needed and ask questions, often frequently. The agent is there to assist you in the process but cannot alas be your advisor. The landlord too, wants you to be successful but cannot run your business or pay the bills as they fall due.

10.  Grand opening.

Make sure you start with some fanfare. Celebrate the opening of the business with friends and neighbours and on social media. You have worked hard to get to this point and everyone involved on the journey will wish you well.

 

Essential Services 2018. What’s new?

The Retail Leases Amendment Act which will commence in 2020 will now override this and these costs will be recoverable under certain circumstances from tenants.

When the Victorian Building Act 1993 was introduced it required owners of buildings to comply with regulations or the occupier was able to attend to those repairs and seek reimbursement or rent offset from the owner. The extract from the Act is fairly straight forward and is listed here: http://classic.austlii.edu.au/au/legis/vic/consol_act/ba199391/s251.html A further requirement concerning the maintenance of Essential Services is listed in part 12 of the Building Regulations 2006 and is listed here: http://www.legislation.vic.gov.au/Domino/Web_Notes/LDMS/PubStatbook.nsf/93eb987ebadd283dca256e92000e4069/79D66077DE4827BCCA2571850013458E/$FILE/06-068sr.pdf  Such items as fire equipment, exit lights, fire doors, paths to exits and the like had to be maintained rather than merely installed when new to satisfy an occupancy permit and left to the whim of the owner or tenant to service. The Regulations also require annual inspection reports signed off by the building owner which must be produced within 24 hours if required.

This has caused much consternation in the property industry as the maintenance of this equipment was no longer something that could be passed onto a tenant as an outgoing cost. My favourite expression at the time was that the change in the law  “overturned 800 years of case law”. It also resulted in an advisory opinion being made on May 1^st 2015 by the President of V.C.A.T. here: https://www.vsbc.vic.gov.au/news-publication/vcat-advisory-opinion-essential-safety-measures/  which supported the view that these service costs could not be recovered from tenants. Retail or otherwise.  Substantial alterations to make buildings comply can also be paid by the owner despite it being for the tenants exclusive use such as in the Panmure Hotel case: https://www.vsbc.vic.gov.au/wp-content/uploads/2014/08/vsbc-vcat-submission-15-May-14.pdf  Whilst the prohibition on the collection of State Land Tax under the Retail Leases Act 2003 is now accepted, essential service costs and compliance still cause concern.  
Some of the issues confronting agents and property owners are as follows:

●             The legislation is not well known and is complex.

●              Assessing a building and applying the appropriate Australian Standard in relation to 
                 essential safety features requires expert advice.                                                

●             Often the person conducting essential service inspections – a growth area – is not a                 building surveyor and the advice offered is limited.

●             Occupancy certificates are rarely available which list essential safety features.
                Council records are often years out of date.

●             Tenants often undertake fitouts or alterations without permits being undertaken
               or do not provide them (nor are they sought) upon completion.

●             Smaller clients and others who should know better are just not interested or feel
                that the law does not apply to them. The V.C.A. T. advisory opinion is not law, it’s
                just an opinion!

●             Clients in denial often say that they will do this themselves or just service the
                extinguishers and exit lights only.

●             Some agents still seek to pass these costs onto tenants.

●             Most tenants are not aware that they do not have to pay these costs and when they
                realize they often demand a refund of their payments.

●             Councils rarely inspect properties unless there is a report. It is also rare that they
                impose a fine.

●             Your insurance cover is likely to be void if the building is not compliant.

●             Arguments can arise as to what is a base building essential service

                and what the tenant added and should be responsible for. It does not matter either way

                as it falls back on the owner 100%. 

●             A minor change with a building alteration may require the whole building to be brought                up to code.  

●             Unless your property manager has a building qualification, they aren’t qualified to                 give advice on this subject and are likely to be not covered by professional                 indemnity  insurance. 

OK, so what are some practical approaches to this? The easy answer is to engage a company nowadays who can contract out the work, maintain the equipment on site and prepare an annual report. You are however in their hands and sometimes the most expensive solution or maintenance system seems to confront you rather than the most sensible and cost effective.

Accordingly, you should try to be aware of these issues as much as you can otherwise, the advice you receive cannot be considered properly. Some items to consider are as follows:

1. If you have not read as much information as is available on the internet articles produced by law firms and the R.E.I.V. you should and keep notes in a file. Not just court cases, but notes put out by fire service companies, locksmiths and the like who are highlighting various issues.
2. Is there an occupancy permit? What are the essential services listed? You should familiarize yourself with this even if you don’t know what the exact Australian Standard referred to means. Glazing, lighting, air handling, canopies etc will all be included.
3. Inspect the building. Is the fire equipment tagged and current? Is there rubbish or other items stored in stairwells and in front of exits? Do the exit doors close and are they in good condition? Has the mezzanine got a permit or is it assembled with timber left over from a previous job? Are the steps and handrails to code? In food premises, are there fire blankets? Are the exhaust fans and ducts cleaned as per code? Are the exit lights on? Is there any obvious new work to alter a fitout? In the basement, have holes been drilled through slabs without fire collars (let alone owners corp consent). Sprinklers, block plans, fire indicator panels and hard wired smoke detectors may also be present. Are there service logs on site for these items? Inspections also pick up illegal works. If it does not look right or appears dangerous such as a trip hazard there are O.H.&S considerations to be considered and action taken. If it does not look right you have to start asking experts about the issue.
4. Has there been a change in the type of use? The current occupier may have been there for decades and does not need to upgrade to a fire hose or single handed door locks as at 2018. They may only need to comply to what the regulation was in say 1975 when the property was constructed. Consider this.
5. Be aware when leasing properties that require extensive renovation or the tenant intends to do substantial works that you cannot contract out of section 251 of the Act despite what the lease might say. The Panmure Hotel case is a good example where the owner thought that the tenant had to bear the cost of upgrading works and instead the owner was compelled to absorb the cost of a new stairwell.
6. If in doubt, ask the service contractor and normally they will give you positive feedback about servicing fire equipment every 6 months for example. Some contractors may also offer different solutions to the same problem. You may need other advice for this.
7. When you have a letter from the council about illegal building works, you need to act quickly. Speak to the tenant and owner to engage a builder or an architect as project manager. A building surveyor will then assess the works required and provide the specification needed. A draftsman will have to prepare plans and you may need a fire engineer, plumbing and electrical input before the builder can quote their part. This can be a very involved process involving many inspections and extensions of time with the council building surveyor.
8. Educate your clients on the importance of compliance. They cannot merely seek to pass on these costs to a tenant or refuse to do the works. You as the agent may end up in court explaining why you let this happen if an accident occurs.  

       Hopefully armed with this information you are better equipped to see that essential services are efficiently serviced and that you are able to have a grasp of the problems and be able to explain them to your clients.

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.