October 23, 2015

Landlords: are you protecting yourself against a lease that goes bad?

Landlords: are you protecting yourself against a lease that goes bad?

You’re ready to enter the market for a commercial property, but it all depends on your ability to rent the property at a reasonable commercial rate.

You’ve found the property, and it all looks right – you’re ready to go.

Well, are you?

As an astute property investor, you will know the risks involved in buying and letting commercial property. You know that if things go wrong, then it usually comes down to just a few issues.

At the beginning of the lease the tenant is keen to go – rent and outgoings will be paid on time – so how good is this? Who said there were any risks in letting commercial property?

Then the tenant hits a lean trading time – it might be Christmas, or it just might be that the tenant has to buy stock, and suddenly the rent payments are delayed or even worse, they stop altogether.

You are alarmed and concerned, but hopeful the tenant will get back on track.

Then suddenly you find out that there is property damage. The tenant is angry and frustrated – at business, life or just an especially bad chain of events. The tenant no longer communicates with you and is behind on payment. The downward spiral is well under way.

Stop – Pause to breathe.

How do you prevent issues from happening?

Your steps are to take the risk out of being a landlord, avoid or at least mitigate damage by tenants and to defuse situations where confrontation might occur.

Getting started with letting a new property is very exciting, but you want a long term tenant who plays by the rules set out in the lease document but more importantly pays on time. Payment is important because you have probably borrowed money but even if you haven’t, then there is the possibility of missed opportunities.

Qualifying the potential tenant is vital. Don’t get carried away in the excitement of the moment. What do you know about the tenant? Has he/she got the capacity to pay the rent and outgoings on time? Has he/she defaulted under other leases? Has he/she got the necessary business experience to make a success of his business enterprise? Use your judgment – is the business enterprise contemplated by the tenant likely to succeed?

Remember this – the world is full of optimists. Some with good reason – others because they have no understanding of the risks involved in running a business. That is quite apart from whether or not the tenant has the skills to manage their business, and even then that doesn’t take into account the possibility that he/she might be under-funded.

Most businesses fail early on because they are under capitalised. Make sure that the tenant is adequately funded – get a statement of assets and liabilities. Find out who is behind all of this. Is it a trust or a company – if so then you will probably want guarantees and so on.

Don’t be afraid to ask questions – of the tenant and of anyone who might know of the tenant and his reliability and viability.

So you are starting to feel a little more comfortable with all of this because you have made your enquiries resulting in a positive outcome.

What underpins all of this?

A carefully drafted lease that protects your interests and binds the tenant for the full term of the lease underpins it all. It provides the rules which the tenant has to comply with – the rules of the game. If the rules are broken then don’t sit on your hands – act and if necessary get legal advice. It is always best to act early, nip any potential problems in the bud. You want to be a fair landlord but most of all you want the tenant to pay and play by the rules.

Remember, a lease (however well drafted) will not be an absolute guarantee that you will get paid or that the tenant will play by the rules. A good lease gives you every opportunity to make sure that you are secure, but all that security can come crashing down if you don’t adequately and properly qualify your tenant. Qualifying the Tenant is your job as the landlord – if you rely on a real estate agent and things go wrong, then it is all on your head. The responsibility resides at your doorstep – don’t wimp out! Do the job and you will have your best chance to succeed.

Since we drew our first commercial lease in the early 1980’s, commercial dealings have changed dramatically. Not just the pace of doing business and creating legal documents but in a major way for the benefit of a landlord. We know so much more about people through the internet and other forms of media. Make sure that you make use of this media to research potential tenants to ensure that you do everything you can to limit your exposure.

A little time and effort spent at the beginning of your new enterprise qualifying potential tenants will pay dividends down the track.

What’s your next step? Contact us. Don Gayler is a lawyer who understands your needs, has a head for business and has the experience to deal with your enterprise.