This is the last of our series on commercial leases. Our focus has been on why more knowledgeable property investors ‘get lucky’ and make money more often than investors who lack this knowledge.
This article makes the point that when buying tenanted commercial property you need to know whether the lease in place is subject to the provisions of the Retail Leases Act 2003 (Vic).
You might think that this is a simple question? However, as a result of poor practices and changing judicial interpretations it can be quite tricky. In one lease that I reviewed recently the lease stated that the Retail Leases Act applied and also that the permitted use did not include any use subject to the Retail Leases Act – the Lease itself was inconsistent.
Even where the lease was drafted correctly – recent court decisions may have the effect that the Retail Leases Act applies even though the parties didn’t expect that the Act would apply.
Some investors may think that this is an abstract legal question that excites only academic lawyers. Unfortunately, getting this question wrong has the ability to cost tens of thousands of dollars in a number of different ways:
Land Tax – you can’t pass on land tax to a tenant under a Retail Lease. If you aren’t aware of this your cash flow may be thousands of dollars less than expected or your tenant may have a claim for improperly charged land tax for past years;
Maintenance – Under a Retail Lease the landlord can’t pass on capital expenses – which again may mean that your cash flow is lower than expected;
Disclosure – If the tenant was not provided with a formal Disclosure Statement the tenant may have the right to terminate the lease; and
Minimum Term – if your lease is unexpectedly a Retail Lease then your tenant may have a right to a five year minimum term. Clearly this would be disastrous if you are planning to redevelop the site in 12 months’ time!
Let Lewis O’Brien & Associates help you make a better commercial property buying decision next time. We offer fixed price Contract Reviews that include a review of lease terms and a range of other issues that will help you make more money from your next commercial property!