Purchased brand new commercial property with tenant in Adelaide,now more than 1 month’s rent unpaid

Hi all, I need some advise regards my current investment property situation. Any info would be greatly appreciated.

I have just purchased a brand new strata titled commercial property in central Adelaide (Ground floor of an apartment building). The property was already leased out on a 5 year contract starting 1st September, 2017. The settlement was on 22nd December, 2017 and I was expecting to collect rent shortly.

Due to the Christmas & New Year’s holiday, my realestate agent was closed when the rent was due (end of each month) and there was no payments made into my account. I contacted my PM after the holidays and they told me the remaining rent for December after the settlement would be calculated and combined with January’s rent. However, by the end of January I received a landlord’s statement for January in the email indicating the rental status was in debit, and there was no explanation about anything in the email. Since I have never had any investment property experience before, I thought that I would still be able to receive the money in a few days’ time (considering time needed for banking transactions and weekends, etc.).

A week has passed and still haven’t received any money, I was greatly disappointed and upset. I tried to contact the account manager (who collects the rent) but no answering, left a message but no reply. I was furious and sent my PM a very serious message to demand an answer. Then I received a call from the account manager telling me that the tenant haven’t paid his rent and demands to change the lease terms and adjust to a lower rent. He refused to sign the Deed of Assignment which my lawyer prepared and handed to my PM at settlement.

Now, many things went wrong at this stage. 1-My PM didn’t let the tenant sign the paper ASAP after the settlement (they are the people who sold me this property, and I agreed to let them continue managing it for me). 2- Christmas holidays has messed up the first payment arrangements. 3- The tenant purposely refused to sign on the new lease after changing ownership, thinking that he could bargain a better deal for himself. He has been reluctant to make contact with my PM and haven’t opened his shop for more than 2 weeks.

Now, a little info about this particular tenant: he is a very young guy (in early 20s) with not much commercial working experience. He’s been running a small French dessert trolley/ kart on Adelaide’s well known shopping street, and he rented my shop as an extension of the business. He signed the lease with the previous owner/landlord (the property developer) and spent almost 3 months shopfitting. He only just started trading by the end of November but the shop was rarely open after that. My PM told me that he was still focusing on the dessert cart on the shopping street. But now, his excuse of not paying the rent was that he didn’t make enough money! Wow! Who would thought that you have to open the shop and work to make money!

This whole situation is just so stupid! Unfortunately, I haven’t organised LL insurance. I never thought that I would need it so quickly.

I have talked to my lawyer and she said even though the tenant haven’t signed the Deed of Assignment, but the terms and conditions from the previous lease agreement would still cover the current situation. I originally asked my lawyer to issue a letter on my behalf and deliver to the tenant, but my PM is now saying that they would deal with him and get to the bottom of it. Because if the tenant doesn’t pay me, he still has to pay the rent to the previous landlord and then the new (me) and the old landlord could work this out afterwards.

Does anyone have any similar experiences? What did you do and what was the outcome? What should I do?

And again, thank you for spending the time to read and I would really appreciate your advise.

 

Well it seems the main decision is - do you want to terminate the lease or not?

 

Well, to be honest, this tenant has left me a very bad first impression. I rather get rid of him and start fresh. As this guy has got $5000 bound and I could keep it if he breaks the lease, which could cover the back payment and the adjustment of fees I paid for him at the settlement.

But, I’m not a heartless person and I do understand how hard it is for a young guy to start a business. He spent time and money shopfitting, buying new equipments and stuff. But if he’s mature enough and did the right thing by negotiating actively with me and my PM it would be a lot different.

I still don’t know what I would do.

 

Except he's not. So I don't know why this hypothetical matters.

That's fine. If you're willing to take the financial loss to effectively subsidise this guy, then go ahead. I guess you need to decide how far you're willing to go.

Shrug.

 

I guess you’re right. Good things don’t always happen to good people. Lessons need to be learned and it shouldn’t be me. BTW, thanks for replying me at such a late time. I thought I would be the only person hanging around a IP forum right now.

 

Are you insured now?

 

Sounds like you are on the receiving end of a pump and dump.

Get any Z grade tenant in, at inflated rent, sell as tenanted investment with a good yield, and leave the mess to the new owner.

1) Get rid of the tenant. He is obviously a Z grade, you dont want them. Issue a notice of termination in the method per the lease. He needs to pay up or get out. Sooner or later (most likely sooner) he will do a runner anyway and accrue more arrears as he goes, so get it dealt with now. Eithern way you are up for vacancy (allow up to 12 months in your cashflow projections)

2) Once you have possession, claim on any security held, appoint a new leasing agent. The current one sounds like a bumbling incompetent

3) Welcome to commercial.

 

Dave could be right about the pump and dump if it’s a new development.
Almost as “genuine” as rental guarantees provided by developers for new apartments.
Is the current rental rate comparable to other similar tenanted properties ?

 

Long story @Askaria.
To address some of your issues raised.

1. The tenant does not need to consent to you buying the property, the lease is transferred to you by the vendor there is no assignment of lease. Your solicitor is misguided if they think that there needs to be a deed of assignment executed by the tenant ie you consent to an assignment if they sell the business not the other way round. A letter of attornment is issued by the vendor's solicitor to notify the tenant of new ownership.
2. It is a retail lease, has the bond been transferred to your name at the bond board or a new bank guarantee with you as favouree provided?
3. Have you signed a management agreement with this agent?
4. What incentive is in the lease ie how many months rent free? Has rent actually commenced? Fitout contributions?
5. Ownership of fitout? Does the tenant own the fitout or have they financed it? Join the queue for payment.
6. To kick out a tenant is not heartless, it will save your marriage (free advice for Valentine's Day)
7. Why are they seeking a rent reduction? What are the compatibles showing from your due diligence?
8. A statement should have been issued at/for the end of December & January as well as at settlement.
9. Why is the tenant being asked to sign a new lease? They should not be in the premises without a lease - lock out time until lease is signed.

 

Yes. But only the property insurance and public liabilities, not LL insurance to cover rent loss. I can’t get it arranged now due to the back payment.

 

The tenant has a $5000 bank security which could cover the rent and fees at this stage.

I have signed a management agreement with the agency until 2022. How can I break the contract?

 

There are only 5 Shops at this complex and mine is the smallest. One allotment is still on sale which is a huge retail/ commercial. The other 3 were all sold and run by the owners.

The yeild of the rent is 6.25% net.

 

Sorry, I’m very new to the realestate world. What is LVR?

 

Loan to Value Ratio.

 

With a hammer?

What does the contract say? You should have read it before you signed it, but now would be a good time to read it.

 

Client from heaven.

Make the relationship untenable and the agent will want out.

 

Thanks for all the advise. I don’t know whether the bank guarantee would have transferred to me atomaticly as the new owner. I will ask my PM about this. The rent free period is 1 month starting from 1 September, 2017. So the rent should be already commenced unless my agent was lying about it. The tenant is responsible for the fit out of the shop and I don’t know if he has a loan for it.

The tenant took almost 3 months for shopfitting and started trading by the end of November. After that the shop was only open a few days of the week. I don’t know wether he couldn’t find or afford a staff to work there (it’s a very small sharp, 1 person could run it). His reason to reduce the rent by $10000 per annum was that he couldn’t make enough money. However he has already signed the lease contract with the previous owner (the developer). I asked my lawyer to prepare a Deed of Assignment because I didn’t know the old lease would still in act.

I have signed the management agreement with my PM until 2022, OMG!

 

Oh, it’s 6.25% net.