Risky? The vendor is the tenant on the Lease

Discussion in 'Commercial Property' started by Sydneyeva, 5th Dec, 2017.

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  1. Sydneyeva

    Sydneyeva Member

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    In process of buying a $3m motel with commercial loan approved.

    Finally had the Lease in front of me, finding the vendor is the tenant on the Lease.

    Information i got was the manager couple would take over the company running motel business and rent the motel property. In this case, shouldn't they be the person signing the Lease?

    Now with the vendor signed the lease, they could have made the rent way above market rent, in aiming to sell the motel property at a very high price, then walk away...

    Could you experienced guys give me two cents here? Much appreciated.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    same legal entity? the lease would be invalid at law because a person cannot contract with themselves. Equity may uphold it though.

    It is common for different entities to contract with each other though. Just be aware of the risks. I had a friend who bought a commerical property with a company as a tenant. He didn't check the back ground of the company - despite my advice (wanted to save $30). it turned out the shareholders of the tenant where the same shareholders of the company that owned the property. Long term lease and great yield. After settlement they paid 1 month's rent and never paid any more.
     
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  3. Sydneyeva

    Sydneyeva Member

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    in my case, it's obvious on the table.

    The vendors leased it to their company running the motel business in the past 19 years, not hiding behind a company.

    It is a quite profitable business and they may give it to the manager couple who have been running the business for them all the time, or keep them as managers.

    I don't see why they will pack away.

    Anyhow, my lawyer is doing DD for me and my banker is organising valuation as well.

    Will update how it goes.
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    There is nothing sinister in it, necessarily. It is good business practice to have different entities own the property to the trading entity.
     
  5. Scott No Mates

    Scott No Mates Well-Known Member

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    • Will the vendor (lessee) be seeking owner's consent to assign the lease to the managers?
    • Will they be selling the shares in the company ie substantial change of shareholders triggering the assignment provisions of the lease?
     
  6. 7020

    7020 Well-Known Member

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    So my biggest concern is when they sign leases that, upon sale, have unenforceable conditions. .

    For example recently I was looking at a medical center (leasing entity is a subsidiary of parent who owns the land) thus this lease is not covered by the retail leases act. However upon sale the lease is then governed by the retail leases act. So clauses such as "lessee to pay land tax, capital work etc" are invalid.

    I pity the person that bought it as any lawyer worth his/her salt would jump all over that.
     
  7. Scott No Mates

    Scott No Mates Well-Known Member

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    @ComPropAgent - a medical centre is not a retail use (in NSW) unless in a shopping centre (as defined) - Linky RLA, refer pg 80

    I can't recall the clause for Victoria
     
  8. 7020

    7020 Well-Known Member

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    So the specific wording in Victoria is

    " (1) In this Act, retail premises means premises, not including any area intended for use as a residence, that under the terms of the lease relating to the premises are used, or are to be used, wholly or predominantly for—

    (a) the sale or hire of goods by retail or the retail provision of services; or

    (b) the carrying on of a specified business or a specified kind of business that the Minister determines under section 5 is a business to which this paragraph applies."

    Now the term "retail provision of services" includes almost anything, as discussed here

    So my default approach is to treat anything as retail and work back from there (using the exemptions listed in the regulations and act)
     
  9. Scott No Mates

    Scott No Mates Well-Known Member

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    @ComPropAgent - I hadn't read that case previously, I bet Westfield & every commercial tenant is overjoyed with that ruling.

    What challenges have been put up by the Industrial and commercial landlords like Dexus, Investa, Challenger, Charter Hall, AMP, Brookfield etc?
     
  10. 7020

    7020 Well-Known Member

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    @Scott No Mates To date, none that I am aware of. There have been similar cases like it in the past but many don't know until the lawyers get involved, usually because there has been a big disagreement about something.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    How old is the lease ?? It may have been recently written to use the going concern basis. Dodgy leases sometimes get used to access the method. Get legal advice on the tax issues and compliance my friend.

    I would have concern that going concern cant be used. Hence GST may apply and be unfunded by lender.
     
  12. Bender12

    Bender12 Well-Known Member

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    What happens if the tenant does not pay? Can you kick them out of the property and then resell the motel management rights?
     

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