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 

 

Mediating a farm debt

The situation: A family farm had got into substantial debt with their lender. Following the procedures outlined in the Farm Debt Mediation Act 2011 the lender (creditor) wrote to the farmers requesting mediation over the farm debt. The farmers agreed.

The process: The matter was then referred to the VSBC by the Department of Economic Development, Jobs, Transport and Resources (this is where farm debt matters commence and they are then referred to the VSBC once a farmer has agreed to mediate with the creditor).

The VSBC dispute management officer looking after the file attempted to get the parties to mediation. This proved somewhat difficult as the farmers, in addition to experiencing difficulties with the lender, were in the process of divorcing, and were waiting on a decision from the Family Court regarding division of their marital assets.

Although understanding of the farmers’ predicament, the lender wanted to undergo mediation as soon as possible as the farmers’ debts were significant. The VSBC dispute management officer managed to arrange mediation for a date after the Family Court decision was handed down, which allowed both the lender and the farmers (whose property settlement had now been determined) to have a clearer picture of how they could come to some resolution at mediation.

The resolution: A complicated and difficult mediation was held between the lender and the divorced couple (who were represented by different lawyers). After much discussion it was agreed that the farmers would both sell property in order to cover the outstanding debts.

Sorting out a farm machinery debt

The situation: A farmer has been in arrears with a small lender regarding a loan for a tractor. The parties had tried to sort out the issue for some time, with the farmer agreeing to a payment plan in order to get up to date with the payments. However after more missed payments by the farmer, the lender (creditor) decided that the matter required mediation.

The VSBC: The lender wrote to the farmer asking him to participate in mediation, to which the farmer agreed. After receiving the paperwork from the Department of Economic Development, Jobs, Transport and Resources, the VSBC arranged a mediation date in a regional centre close to the farmer’s property.

The resolution: Between the time that mediation was arranged and the mediation date, the farmer managed to sell a property that had been on the market for some time, and contacted the creditor offering to make arrangements to pay off the machinery loan in full. The creditor was happy with this and the matter was settled without the need for mediation.

Seeking a claim on a terminated contract

The situation: An owner driver's contract was terminated by the hirer on the grounds of breach of contract and serious and willful misconduct. The owner driver is seeking a claim for damages, compensation and the reinstatement of the contract.

The VSBC: The owner driver put forth an application for dispute resolution with the VSBC regarding the contract he had entered into with the hirer in 2010. At the mediation, the Transport Workers Union (TWU) represented the owner driver, while the hirer had legal representation.

The resolution: The outcome of the mediation was successful, with the parties agreeing to settle and resolve the dispute. The hirer was to re-contract the owner driver with certain terms, in particular that a satisfactory driver safety assessment was completed prior to the driver recommencing work, and strict compliance with the hirer's OH&S policy.

The hirer was also to provide the owner driver with the same regional run upon completion of the safety assessment with a metro run to be added when available. The hirer confirmed its intent to give notice to all contractors of the importance of its OH&S policy as an integral element of all owner driver contracts.

In addition to sorting out the individual dispute, the outcome also served to assist the hirer in reinforcing with all of its contracted drivers the importance of complying with OH&S obligations.

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.

Missing out on a tender process

The situation: The applicant had a cleaning contract with the respondent to clean a number of suburban buildings. After a number of years, the arrangement is terminated in accordance with the contract.

The respondent puts the cleaning job out for tender, which results in the appointment of a new cleaning firm.

The applicant had not been approached to re-tender for the contract and is upset about this. The respondent acknowledges that the applicant has been inadvertently left out of the list of businesses it approached to tender.

However, it is too late to do anything about it as a new contract has been signed with another firm.

The VSBC: The applicant contacts the VSBC to understand their rights and obligations in regards to the dispute.

The resolution: The VSBC negotiates with all parties to arrive at a satisfactory resolution. In this case, the applicant is engaged by the new contractor as an employee, with the agreement of all parties.

Dealing with a dispute through preliminary assistance

The situation: A small business (the applicant) complains to the VSBC about a commercial dispute with an oil company. The business is concerned that it had been paying too high a price for services, compared to some competitors who had been receiving a discounted rate.

The process: The VSBC contacts the oil company (the respondent), who refers the matter to its solicitors. The oil company’s solicitors provide a formal response, which indicates that their client had sought to resolve the matter, however, the applicant had refused to compromise its claim. Accordingly, the response from the solicitors indicates that their client refuses to attend VSBC mediation.

The resolution: Notwithstanding this response, the applicant advises the VSBC that the respondent has continued to seek to resolve the dispute by direct negotiation.

This process resolves the dispute between the parties. The applicant is appreciative of the preliminary assistance provided by the VSBC, without which the applicant considers the matter would not have resolved.

Fixing a problem with the supply of farm equipment 

The situation: A farmer had purchased a new tractor, but discovered after delivery that poor assembly had led to a number of apparent defects, including nuts and bolts being lost, hydraulic oil leaking, the keys not fitting the doors (preventing the tractor from being locked) and cracked mirrors.

The farmer contacted the supplier about the issues, and was assured that these matters would be addressed, but nothing happened for two months.

When the farmer engaged the tractor in 4WD for the first time and after only 19 hours’ use, oil leaked from a broken transfer box. He ordered a replacement transfer box, which took two months to be delivered.

Following receipt and installation, the same problem occurred when the tractor was put into 4WD, suggesting a fault elsewhere in the tractor. The supplier subsequently refused to discuss the matter with the farmer.

The VSBC: The farmer lodged an application with the VSBC, seeking a $30,000 refund or a replacement tractor. When contacted by the VSBC, the supplier agrees to attend mediation.

The resolution: Mediation is successful and the supplier agrees to take back the tractor at its expense. It also agrees to supply a new tractor with warranties, paper work and assurances of follow-up service if necessary.

Assisting in a franchise dispute

The situation: A franchisee entered into a contract with a franchisor for a business. The franchisee alleges that she has relied on representations made by the franchisor about the earning capacity of a franchise store, the cost of goods sold and fit-out commitments.

Those expectations have not been realised, and the franchisee is seeking substantial damages, including a return of the franchise purchase price and trading losses.

The process: The franchisee lodges a dispute application against the franchisor with the VSBC under the Small Business Commissioner Act 2003. Both parties agree to attend mediation, and both bring legal representation on the day.

The resolution:

The mediation is successful. Key terms of settlement include:

  • waiving the monthly franchise fee and monthly marketing fee for specified periods;
  • progressive repayment of outstanding rent by the franchisee to the franchisor until arrears are cleared;
  • the franchisor (as head tenant) agreeing to endeavour to negotiate further rent relief from the head lessor;
  • the franchisor, at its cost, undertaking or completing designated fit-out works;
  • the franchisor assisting the franchisee to sell the franchised business at fair market value for a specified period of time in a number of specific ways.
Addressing the supply of problem equipment

The situation: A sporting services business operator has paid more than $100,000 for a ball management system. The system has not worked properly for more than 12 months, despite efforts by the supplier to fix the problems over an extended period.

The operator eventually installs an alternative system provided by another supplier, and seeks recompense from the original supplier.

The VSBC: The operator approaches the VSBC to seek assistance through mediation. A dispute management officer is able to convince the supplier to attend mediation to attempt to address the long-running problem.

The resolution: Settlement is reached at mediation with the original supplier agreeing to pay a substantial sum to the operator.

Addressing wholesale supply issues

The situation: The applicant is a business that provides a range of complete products to the building and home renovation sector. These products utilise components from another business.

The applicant claims that the supplier has over-charged and double-charged for orders, has not met size specifications, and has then charged again when the supply of the components has been corrected .

Despite assurances that these matters would be addressed, the latest invoice from the supplier makes no adjustments to the outstanding amount.

The supplier addresses some issues by credit note, but rejects other claims of over-charging, double-charging and incorrect provision of components. The supplier maintains that the current outstanding amount is around $15,000 and is threatening legal action if the account isn’t paid.

The VSBC: The parties agree to mediate, and both provide large amounts of documents to the VSBC to justify their positions. A succinct summary by the applicant of its claim and the supplier's responses both assist in the mediation process.

The resolution: The parties settle their dispute at mediation with the applicant paying the supplier $10,000 in full and final settlement of all matters in dispute.

Assisting businesses of all sizes

The situation: The applicant, a major facilities management company, was supplied with two fans for its large premises as per a quote detailing the cost and capacity of the fans.

The fans were custom-built by a manufacturer, and distributed by a supplier. Upon delivery it was discovered the wrong fans had been provided, but the supplier, a small to medium-sized Victorian business, refused to accept the return of the fans.

It was later discovered that the quoted technical specification for the fans was incorrect and the fans were too heavy for the roof of the premises to withstand. The supplier nonetheless is seeking payment of an invoice of $14,000.

The VSBC: Usually, the VSBC receives commercial complaints from smaller businesses. However, in this case, the applicant was a much larger business than the supplier. There is no legislative constraint on the VSBC to accept complaints by the size of a company -- instead the prospect of a mediated outcome that avoids litigation for both companies is consistent with the objectives of the VSBC.

In this case the applicant and the supplier (the respondent) both agree to mediation.

The resolution: The customised nature of the fans means that the supplier cannot accept their return. The mediator proposes contacting the manufacturer of the fans. Although the manufacturer is not a party to the mediation, the parties agree to this proposal. The mediator speaks with the manufacturer by telephone, explains the situation and seeks assistance (without any suggestion of liability) from the manufacturer in helping to resolve the dispute.

The manufacturer is unwilling to provide a full refund for the fans as they have been custom-built, but is willing to take the fans back to extract parts that could be re-used (the fans are still in their original packaging). The manufacturer offers to provide a credit note to the supplier of $4000, and this is confirmed by email.

With the outstanding matter in dispute now $10,000, the mediator notes that both the applicant and the supplier had contributed in some way to the dispute arising, and the parties agree to split the difference. The applicant agrees to pay $5000 to the supplier, and transport the fans at its own cost to the supplier’s premises.

Resolving a trade breach

The situation: The applicant bought an importing business from the respondent's company. The contract of sale provided that the respondent was not allowed to trade in a similar business in Australia for a period of four years.

The respondent continued to work in the import business as a contractor for three-and-a-half years, initially in a full time capacity and then part time.

The applicant became aware that the respondent, while contracting part time, had travelled overseas to promote the applicant’s products to prospective customers, but that he was also discussing the production of similar products with prospective suppliers.

Furthermore, a current supplier advised the applicant that the respondent had ordered three 40-foot containers of products from that supplier for the respondent’s own business.

The VSBC: The applicant sought compensation of $60,000 in loss of sales and breach of contract. The matter is referred to the VSBC for dispute resolution. The respondent agrees to mediation

The resolution: With the mediator’s help, the parties reach a settlement whereby the respondent agrees to pay the applicant $25,000 to put an end to the dispute.

Mediating a shareholder dispute

The situation: There was a major falling out between one of the shareholders of a private company (the shareholder) and the other shareholders (the remainder).

To complicate matters, the shareholders were made up of companies, as well as individuals, and shareholdings were not uniform. After the company was established, a shareholders’ agreement was prepared, but it was never executed.

The shareholder had worked at the company as an employee after it began trading, but the company had terminated his employment due to alleged breaches of a number of the company’s policies.

The shareholder, who was one of the initial directors of the company but had since resigned this position, was the sole guarantor in the retail lease entered into by the company.

The VSBC: The shareholder and the remainder were in dispute around a number of issues including: shareholdings and share entitlements; employee entitlements and conduct; valuation of the business; the sole guarantor role of the shareholder; alleged loans; and allegations of defamatory comments and threatening behaviour.

Solicitors for both the shareholder and the remainder requested mediation through the VSBC to resolve these issues without litigation. The mediation is attended by all shareholders or their authorised nominees, and both sides have solicitors present.

The resolution: The mediator assists the parties to reach a settlement, which results in the shareholder agreeing to sell his shares to the remainder in equal amounts, for a specified sum, within 30 days.

The company agrees to approach the landlord of the retail premises to remove the shareholder as guarantor, replacing him with either: a substantial additional security deposit provided by the remainder; joint and several guarantees by the remainder; or indemnities by the remainder to the shareholder if the landlord will not amend the lease guarantee.

All employment and loan related matters are agreed to be settled with no further action by any party.

Finally, each party withdraws allegations of impropriety, and all parties agree not to make disparaging comments in any form about the other party or the business. The shareholder agrees he would not make any representations that he was associated with the company.

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