A Lease Proposal (Heads of Agreement) contains a summary of the agreed terms. It is not the final Lease, and so it contains 'subject to' conditions, such as:

availability of the Premises
landlord's board / lender's approval
satisfactory legal documentation being entered into by the parties

From time to time, the question arises: When is the tenant legally bound under the lease? The answer is: When the 'subject to' conditions have been satisfied.

In a recent NSW Supreme Court decision, a tenant argued that it could walk away from the lease even after returning the signed lease, a bank guarantee for the security bond and a certificate of currency for insurance to the landlord's solicitor because the landlord had not signed the lease. At stake was $735,000 in unpaid rent.

The Court agreed with the tenant that the 'subject to' condition of 'satisfactory legal documentation being entered into by the parties' was ambiguous because it did not specify how the documentation was to be entered into.

After one day in Court and 18 months after the tenant had walked away from the lease, the Supreme Court interpreted the 'subject to' condition in favour of the landlord, and the tenant was ordered to pay the back rent.

The 'moral' is that the 'subject to' conditions need to be clearly drafted, so as to avoid legal disputes. In this case, instead of 'satisfactory documentation being entered into', it would have been clearer if it had read 'documentation satisfactory to the landlord being received by the landlord'.

To read my case note, click on Take care with the 'subject to' conditions in a Commercial Lease Proposal

What happens when a purchaser caveats the property they are buying?

Property vendors are anxious to know what happens when a purchaser registers a Caveat over the property they are selling under a Contract for Sale.

They ask: Will the Caveat derail the sale and what should I do? This is a guide.

First: Why has the purchaser registered a Caveat? If it is because they have released the deposit to the vendor or if settlement is deferred beyond the standard time, then it is perfectly justifiable for a purchaser to register a Caveat, provided they have been granted a 'caveatable interest' in the Contract for Sale.

Second: How does the Caveat affect the vendor? Anyone searching the title will see the Caveat - if they are a lender, they will not lend more money to the vendor; if they are another purchaser, they will not enter into a Contract of Sale with the vendor; unless the Caveat is removed. So a Caveat restricts the vendor in refinancing or re-selling the property.

Third: Is there a dispute with the purchaser? If there is no dispute, then the purchaser is using the Caveat to legitimately protect their interests, and will come to settlement with a Withdrawal of Caveat. But if there is a dispute, the purchaser is using the Caveat as a bargaining chip against the vendor. If so, the vendor needs to take action.

Fourth: What action can a vendor take to remove the caveat? The process is called lapsing the caveat. The vendor serves a lapsing notice which gives the purchaser 21 days (in NSW) (14 days in Qld) to apply to the Supreme Court to maintain the Caveat on the title. If the purchaser does nothing, the Caveat will be removed from the title by the Lands Registry.

Fifth: What happens if the purchaser goes to Court? For a vendor, the most significant part is that the purchaser must 'proffer an undertaking as to damages' which means that they accept responsibility to compensate the vendor for all losses, if the court agrees to maintain the caveat on the title until the dispute with the vendor is determined by the court.

In a recent case before the Supreme Court of NSW, the purchaser applied to maintain their caveat. But when the moment came, they refused to accept responsibility for losses the vendor might suffer. As a result, the Court ordered the Caveat be removed and the purchaser pay the vendor's legal costs of going to court.

For my case note click Will a purchaser's caveat stand without an undertaking as to damages?

An investment loan is not repayable without proof of the money trail

When Michael Howard invested in the Great Southern 2006 Organic Olives Income Project he took up the loan offer from the finance arm of Great Southern to fund the total cost of $24,490. In turn, Great Southern Finance nominated ABL Nominees, a company associated with the Bendigo and Adelaide Bank to be the lender.

For three years Michael Howard paid interest on the loan to Great Southern Finance. Not long afterwards the project was wound up because it had run out of money to cultivate the olive trees. He never received one dollar in return from his investment.

Seven years later, Michael Howard was served with a Statement of Claim from the Bendigo Bank to recover the loan, which by then had grown to $66,569.32 with interest. He decided to fight the claim.

Last week, he succeeded in defeating the claim, not because the project failed, but because the Bendigo Bank was unable to prove that a loan advance had been made. It had a paper trail - a loan deed and associated documents. But did not have a money trail to show that the money had been transferred to Great Southern to pay for the investment.

So in a roundabout way, justice was done. Michael Howard was not forced to pay the investment loan for a failed project. And the Bendigo Bank was ordered to pay his legal costs.

This decision has significance far beyond Michael Howard. He was one of 22,000 investors in Great Southern Projects who used the finance arm to fund their investment, and one of several thousand investors who dispute their loan.

Michael Howard's victory shines a light which may help these investors. For my case note click on No evidence of a loan advance sinks the Bendigo Bank's loan recovery action against a Great Southern investor.

Don't sign a personal guarantee to a lease unless you absolutely need to!

When a businessperson negotiates a lease of a shop, their focus is on the rent, the rent free period, the term, the options to renew, the security bond and the permitted use.

The personal guarantee for the rent is an afterthought, unless giving one means a 1 month security bond is negotiated instead of 3 months security bond without one. The fact that giving a director's guarantee removes the asset protection of leasing in a company name is rarely considered.

Fast forward, and for whatever reason, the business is going bad because it cannot make enough sales. The tenant falls behind on their rent. The landlord terminates the lease.

What was once an afterthought becomes the major source of financial stress as the landlord pursues the director's personal guarantee: for rent up to the lease termination, then for rent lost until the shop is re-rented, and finally for make good expenses. Legally, there are few defences to claims made by landlords under personal guarantees.

Two recent decisions by the NSW Court of Appeal demonstrate how financially ruinous a personal guarantee can be:

The directors of the ex-tenant - Panetta Fruits at Westfield Miranda were ordered to pay $3,674,555.53 under their personal guarantees, which was equivalent to over 3 years rent.
The director of the ex-tenant - Circa Newsagency at CircaRetail Bella Vista was ordered to pay $602,178.35 which was equivalent to several years rent.

What options does a tenant have when the landlord demands a personal guarantee? The best option is to offer more security bond - 3 months is common - instead of a personal guarantee. The second best option is to limit the personal guarantee to say 3 or 6 months. The third option is to walk away from the lease.

For my detailed comments on the two Court of Appeal decisions, click Two retail tenancy failures expose directors who gave their personal guarantees to the landlord to ruinous losses

New sunset clauses law protects purchasers by overriding vendor rights to end an off the plan Contract

The new sunset clauses law in NSW is proving useful to property purchasers in a rising market by allowing them to override the vendor’s use of the sunset clause, and to enforce an off the plan contract.

Click for full details

If you are moving out of a shop or office, do you repaint or leave it as is?
If you own or rent a shop, office, warehouse or factory, the ‘make good’ covenant in the lease usually requires the tenant to repaint the inside. The question is, can the landlord recover what the cost of repainting would be, without actually doing the repainting?

For more click - If you are moving out of a shop or office, do you repaint or leave it as is?

When buying commercial property, you need to know if the price inclusive or exclusive of GST
If you buy a meal, groceries, petrol, and so forth, GST of 10% is included in the price. In fact, the prices of consumer items must include GST, by law.

With real estate it's different. This is a quick guide:

Second-hand residential property sales - houses, apartments, villas - no GST is payable
New residential property sales - off the plan or newly completed - GST is payable by the vendor, and it is included in the price
Commercial property sales - shops, warehouses, offices - normally, no GST is payable if sold subject to lease, but GST is payable by the purchaser if sold vacant
Land sales - farms, vacant land, acreage - GST may or may not be payable by the purchaser depending on whether used for farming, whether sold in the course of an enterprise, or whether the vendor is or needs to be registered for GST

As you can see, when buying commercial real estate, knowing whether the price is treated as GST inclusive or GST exclusive is essential.

Otherwise, as purchaser you may receive a nasty surprise and need to find another 10% on top of the price to pay the GST. This cash outlay for the GST will need to be carried until the next BAS statement is lodged, and a credit is claimed. Also, to add insult to injury, extra stamp duty is payable on the GST.

The GST treatment needs to be properly covered in the Contract for Sale.

If not, a dispute may arise which goes to Supreme Court to decide whether the price was inclusive or exclusive of GST. To see what happened in a recent case, click my article - Watch out for the GST hazard when buying commercial property

Off the plan purchasers can breathe easy - the new sunset clauses law has teeth!
Property Developers will need to be a bit smarter if they are thinking of using sunset clauses to terminate a sale contract

Keep an eye on the sunset date if you are buying off the plan
What happens at the sunset date?

Is the landlord responsible for unsafe electrical supply?
One of the beautiful things about being a commercial landlord is that you hand over the premises to the tenant ‘as is’. There is no obligation on a commercial landlord to make the premises ‘fit for purpose’

Why landlords and tenants face special risks when leasing strata shops, offices and industrial premises
This article covers four commercial leasing issues for strata shops, offices and industrial premises-
Building repairs; Tenant signage and fit-out; Strata Levies; Tenant use and trading

Director Guarantees in Commercial Leases – What damages are recoverable?
What financial exposure does a director undertake by providing a personal guarantee the performance of a commercial property lease?

Bankers must get on with the job of selling a property security as mortgagee in possession … or face the consequences
Bankers have always assumed that they have all the time in the world to sell a property under a power of sale, without liability for loss because of delay. This assumption is no longer correct.

Does the bankruptcy of a personal trustee or appointor of a discretionary trust expose the trust assets?
The trustee in bankruptcy cannot seize the family trust assets for the benefit of creditors.

Joint Ventures for Real Estate Investment and Development
If two people combine their knowledge and their money in a property venture, they will often achieve more as partners than they would achieve on their own.