Thinking outside the square when negotiating rent

Read how a tenant running an accounting firm and her landlord avoided a stalemate and agreed on a new rent.

A tenant has an initial three-year lease with options for two further terms for her small accounting practice in a regional town. At the end of the first three-year term, the tenant exercises her option for the second term.

Under the terms of the lease, the rent for the new term is to be determined by a market rent review.

The landlord wants to increase the rent, while the tenant believes it should remain the same. Neither party can agree, nor can they agree on a valuer to independently determine what the rent should be. The parties are at a stalemate. Eventually, the landlord makes an application to the VSBC to appoint a Specialist Retail Valuer (SRV).

The process:

When the VSBC receives an application to appoint an SRV, the standard process is to approach either the Australian Property Institute (API) or the Real Estate Institute of Victoria (REIV) to nominate an independent SRV. Once both parties sign the valuer's terms, the VSBC then formally appoints the SRV to determine the rent.

At this point, rather than approach the API or REIV for a nomination, a VSBC Dispute Management Officer facilitates discussion and negotiation between the parties to try to reach agreement on a new rent.

The resolution:

The relationship has broken down considerably by this stage and the parties are no longer on speaking terms. Instead, the Dispute Management Officer works with the parties separately via email and telephone to negotiate a rent that they are both willing to accept. It saves them both the cost of an SRV and allows them to move forward.

For more information refer to the VSBC Information Sheet – Rent Reviews 

 

Negotiating a new lease 

The situation: A tenant runs a business with a substantial turnover on a very large land area. There has been no lease renewal since the original lease expired in the early 2000s.

The landlord has approached the tenant to negotiate a new lease at double the rent being paid – which had not changed for many years.

The process: The tenant refuses to pay the increased rent, and lodges a dispute application with the VSBC.

At mediation, during private session, it becomes clear that it would cost the tenant more than $2 million to relocate the business, assuming an alternative site could be found, and at an unknown rent. A long term lease on reasonable terms is in the tenant’s best interests.

The landlord is aggrieved that the rent has not increased in many years, but may experience difficulties finding an alternative tenant for the land and premises.

The resolution: The parties eventually reach a settlement whereby the terms of a new lease provide for four three-year terms, a starting rent of between the current and the asking rent, a specified percentage increase each year, and a market rent review at each option.

The tenant gains a lengthy security of tenure – albeit paying a more market-based rent – while the landlord secures an ongoing tenant with a lower-than-requested starting rent, but with reasonable rent increases and regular rent reviews.

Make-good after a long term month-to-month tenancy ends

The situation: Two adjoining premises (Suite A and Suite B) are owned by the same landlord. The tenants were on a month-to-month tenancy for many years but have vacated both premises some months earlier. The parties are in dispute over the ‘make-good’ of the premises.

The landlord had required that partitions installed in each of the premises be removed, while the tenants maintained that the agent, who inspected the premises prior to them being vacated, had indicated that the partitions could remain as they might assist in re-letting the premises. The agent denies this. The amount in dispute is around $4000.

The process: The landlord refers the matter to the VSBC and the parties agree to mediate. At mediation, it emerges that the tenants had occupied the premises for more than 30 years.

They had initially entered into fixed-term leases, but these had expired many years ago after which the tenant continued in the premises on a month-to-month basis. Both tenant companies had been delisted some years ago and were no longer in existence.

Furthermore, the sole director and guarantor of one of the companies had died more than 10 years ago.

The person attending the mediation on behalf of the tenant had been a director and guarantor of one of the now delisted tenant companies and states that he is representing the tenants of both premises. In his view, the tenants have no obligation to remove the partitions and there is no certainty regarding when they were erected. He maintains that the agent had agreed that the partitions could remain.

The agent is adamant that the partitions were only allowed to remain as long as they assisted in re-letting the two suites but, since the suites have not been re-let since the tenants vacated 12 months before, the partitions now needed to be removed at the tenants’ expense.

The resolution: The likelihood of the Victorian Civil Administrative Tribunal determining against the tenants, given the circumstances and the amount of uncertainty, is raised during mediation.

The expense and difficulty of such litigation is discussed by the parties and they reach agreement to share the cost of removing the partitions equally as full and final resolution of the matter.

Questioning the permitted use of a premises

The situation: The tenant claims that his lease allows for the sale of nuts in his retail food business, based on assurances made by the leasing agent.

After the tenant has fitted out the premises at significant expense, including a special nut stand, the leasing agent informs the tenant that the landlord has advised that nuts should not be sold at the premises, based on the permitted use of the premises in the lease.

The VSBC: The tenant refers the matter to the VSBC and mediation is held.

Discussion at mediation revolves around the question of whether the permitted use of the premises in the lease adequately covers the intended purposes of the business. It also covers what oral assurances have been made by the leasing agent or the landlord to the tenant.

The resolution: After much discussion, the matter is settled, with the landlord agreeing that nuts can be sold, provided an agreed percentage of the floor space display is not exceeded, and that local health regulations are observed.

Refusing to consent to an assignment of a lease
Interpreting a messy assignment clause in a retail lease

The situation: A tenant (who runs a pharmacy) has been leasing a building for many years and wants to continue. However, there is a clause in her lease that provides her with two further options to renew the lease, but only if she sells the business or assigns (transfers) the lease. The landlord is thinking about adding a second storey to the premises and doesn’t want to extend the lease.

Prior to the current lease coming to an end, the tenant had sought to transfer the lease to a related company, maintaining that, in doing so, she had activated the relevant lease clause that gave her the two extra options.

The landlord disputes this because the tenant hasn’t sold her business and there is no reason or basis for transferring the lease. The landlord thinks the tenant is taking advantage of the clause simply so she can stay in the premises.

The landlord is also concerned that, if the options to renew the lease are extended, a market rent review may result in a significant rent reduction from the current rent.

The tenant acknowledges that the only reason for transferring the lease is to get the two options to renew, but is adamant that the clause in the lease doesn’t preclude her from doing this.

The VSBC: The landlord refers the matter to the VSBC and the parties agree to mediate. During mediation it becomes clear that the tenant owns both the business and the pharmacy licence, and is a director of both companies, so in fact, there would be no change in business operator. However, the parties reach agreement that the tenant could transfer the lease from one company to another.

The issue remains as to whether a transfer -- which would be solely for the purpose of the tenant gaining the two options to renew the lease -- activates the clause in the lease and creates an entitlement to these additional terms.

The resolution: During mediation, the landlord agrees to grant the tenant a new three-year lease with a three-year option at a particular rent.

After some negotiation, the tenant agrees to the rent requested and to provide a security deposit equivalent to two months’ rent as consideration for the new lease. The parties also take the opportunity to replace the old, messy and disjointed lease, with a new standard form lease.

Both parties are happy with the outcome:

  • the tenant gets the lease term she wanted;
  • the landlord gets the rent he wanted, as well as a security deposit that the old lease hadn’t provided for;
  • both parties get a contemporary lease document
  • both parties save a substantial sum of money, which they otherwise would have spent on litigation and a market rent determination.
Fixing a problem with the air conditioning 

The situation: The tenants run a business involving the operation of expensive equipment that they said was being affected by the lack of fully functioning air conditioning.

They had sourced their own portable air conditioning units as a temporary solution because the landlord refused to fix the problem.

With summer approaching, the tenants are concerned about the pressing need for an operating air conditioning unit. The existing air conditioning unit then fails completely.

The VSBC: The tenants make an application for dispute resolution with the VSBC. The dispute management officer handling the matter discusses the issues with both parties over a series of phone calls, with the landlord agreeing to install a new air conditioner in the premises.

Although pleased the landlord is going to address the air conditioning issue, the tenants still want to mediate the matter to claim compensation under the Retail Leases Act 2003 for the losses they had suffered, including the cost of the temporary units, temporary relocation of their activities and lost wages.

The resolution: At mediation, the parties reach a compromise on these issues and this includes the payment of a fixed sum by the landlord to the tenants as full settlement of the issues.

Repairing the relationship between tenant and landlord

The situation: The tenant has leased premises to produce cakes and bakery products, and has done so for a number of years. The premises include a cool room that is critical to the operation of the business.

The compressor to the cool room has stopped working. A technician told the tenant that the compressor was beyond repair and would cost $7000 to fix. The tenant agreed, and a new compressor was installed.

The tenant seeks full reimbursement from the landlord. The landlord refuses, arguing that it is the tenant's responsibility to maintain and repair the compressor.

The VSBC: The dispute progresses to mediation with the VSBC. At first, both parties refuse to budge: The tenant wants to be repaid in full. Meanwhile, the landlord argues that the compressor had not been kept in good repair.

It emerges during mediation that the compressor is more than 20 years old and at the end of its functioning life. The landlord is also informed that the tenant could take the compressor with him at lease end, as he has paid for it. Once this information comes to light, the landlord offers to pay the tenant $5000.

The tenant is willing to accept $6000 to end the matter. But neither party will budge further.

The resolution: The mediator proposes an option whereby the landlord offers the tenant a rent-free period by way of reimbursement. Both parties agree to this and the sum of $6000 is decided upon.

The tenant is happy with a $6000 reduction in rent, and the landlord recognises that, after tax, the amount is less than the $5000 the landlord was prepared to pay.

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