Removing an Existing Tenant

Discussion in 'Commercial Property' started by sarcasm, 4th Feb, 2020.

Join Australia's most dynamic and respected property investment community
  1. sarcasm

    sarcasm Member

    Joined:
    24th Jan, 2018
    Posts:
    8
    Location:
    VIC
    Here's one for our commercial gurus! It's a bit of an odd one because we usually seek long term tenants but in this situation this presents an issue.

    Hypothetically lets say you purchase a commercial property and have long term tenants who at the time had already commenced a 3 year tenure with three further 5 year terms. Market review is not applicable and CPI review is valid. Having purchased a tenanted property you understand that this lease cannot be terminated, rather transferred to yourself; allowing you to make no adjustments to the lease agreement.

    Now lets say you wish to utilise this space more effectively however cannot remove the tenants from the premises nor can you over rule their favourable lease agreement. In addition to this you cannot increase their rent during the further terms with the exception of CPI reviews.

    What would your options be to:

    1. remove the tenants; or
    2. increase the rent.

    I understand that you can increase rent in the rare occasion that comparable rents in the area are much higher. But for this situation lets assume the business is unique and there are no other similar properties in the area.

    The other option is to demolish/ renovate, however let us not consider this in this situation.
     
  2. jaydee

    jaydee Active Member

    Joined:
    25th Mar, 2016
    Posts:
    35
    Location:
    Perth
    You haven't stated exactly why you would want to remove a supposedly compliant tenant?

    If you wanted them to change their lease arrangement you could offer them a financial inducement to end their current lease. Only you can know the financials of what is possible.
     
  3. sarcasm

    sarcasm Member

    Joined:
    24th Jan, 2018
    Posts:
    8
    Location:
    VIC
    As I mentioned, you want to utilise the space more effectively. An example would be to operate a business if it was a warehouse by converting it into a gym or storage yard etc. Notwithstanding the increased risk, there would be incentive for greater yields. Conversely you would be looking to increase the rent, keeping the same tenant.

    Payout is an option, however not a very feasible one.
     
  4. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    16,593
    Location:
    Sydney or NSW or Australia

    There are no circumstances under the lease that you can apply an increase other than in accordance with the rent review clause. The tenant enjoys a below market rent, you reviewed the lease in your due diligence and see stuck with the tenant on those terms.

    What do you mean by transferred to yourself? If you own the property and the lease is assigned to you as occupant then the lease is terminated sad you can't lease to yourself. If you mean you buy the premises sad a going concern, you accept the existing lease warts and all.
     
    hobo and Stoffo like this.
  5. sarcasm

    sarcasm Member

    Joined:
    24th Jan, 2018
    Posts:
    8
    Location:
    VIC
    Transferred in terms of landlords obligations are transferred to oneself. Yes going concern sale. Not very ideal for the investor, as their circumstances may change and they may want to adopt more risk and return!
     
  6. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    16,593
    Location:
    Sydney or NSW or Australia
    That's what you bought, you live with it knowing that you won't get a market review until the tenant vacates hence you paid a reduced price factoring in the lower cashflow over the term certain.
     
    ellejay, Beano, EK01 and 2 others like this.
  7. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    4,482
    Location:
    Qld
    Why buy it in the first place if you are unhappy with the terms and conditions?
     
    ellejay, EK01, hobo and 4 others like this.
  8. sarcasm

    sarcasm Member

    Joined:
    24th Jan, 2018
    Posts:
    8
    Location:
    VIC
    Let's try think outside the box team, I wasn't asking for flaws in the procedure, rather an intuitive way out!
     
  9. wylie

    wylie Moderator Staff Member

    Joined:
    18th Jun, 2015
    Posts:
    7,640
    Location:
    Brisbane
    Thinking outside the box won't help if you've got a lease and that will stop you from removing the tenants or increasing the rent.

    What sort of "intuitive way out" are you hoping to find?
     
    EK01, Perthguy and hobo like this.
  10. Archaon

    Archaon Well-Known Member

    Joined:
    20th Mar, 2017
    Posts:
    1,271
    Location:
    Newcastle
    Ghosts?
     
    sarcasm likes this.
  11. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    16,593
    Location:
    Sydney or NSW or Australia
    Just hope that they miss a critical date then serve notice. That's as good as you're going to get.
     
    Brumbie and sarcasm like this.
  12. Marg4000

    Marg4000 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    4,482
    Location:
    Qld
    I doubt there is a way out.
    Sometimes things are exactly as they are.
     
    Cousinit, Brumbie, Beano and 3 others like this.
  13. Paul@PFI

    [email protected] Tax Accounting + SMSF Business Plus Member

    Joined:
    18th Jun, 2015
    Posts:
    11,550
    Location:
    Sydney
    Have you asked the tenant how they feel about the site? I broke a commercial lease with 100% agreement with the owner twice. Each time we were happy to quit and move on each successively larger. The third time we purchased. And were paid for the fitouts each time by the owner who then leased it with a fitout and we didnt have to dump it.

    You cant "transfer a lease to yourself". Anyone can mutually terminate a lease if you both agree to terms. You never know they may want out for somewhere bigger / smaller or different location or be struggling to pay.
     
    Brumbie and wylie like this.
  14. Omnidragon

    Omnidragon Well-Known Member

    Joined:
    17th Oct, 2015
    Posts:
    1,146
    Location:
    Victoria
    You could offer to buy their lease out