lovely restaurant, pity about the bad tenant

[bobbiemenzies]

My elderly parents own an IP that has been a successful restaurant for most of its 30 year history. The restaurant is on a highway in a respectable and decent suburb around 8km from the city.

The latest tenant has run the business down and, thankfully, his lease is almost over - we won't be giving him the 5 year option as he can barely afford the rent, let alone outgoings which remain unpaid for over a year. The last straw was when he tried to burn the restaurant to collect insurance money - passers-by had to call the fire brigade as his staff watched the flames! It was a bad mistake to let him in in the first place. He managed to fake his way into persuading us that he had previous restaurant experience and our trust was misplaced.

We have found a new prospective tenant with a good track record. But she doesn't want to sign a proper lease as we have always done with the others over 30 years. "Just copy the old lease and change the names" she says.

I'd appreciate any advice on leases and any clauses we should put in to protect my elderly parents. Rent from this restaurant comprises their entire income and we want security and continuity - we don't need folks who come and go or run the business down.

On-topic advice appreciated.

 

[Propagate]

My elderly parents own an IP that has been a successful restaurant for most of its 30 year history. The restaurant is on a highway in a respectable and decent suburb around 8km from the city.

The latest tenant has run the business down and, thankfully, his lease is almost over - we won't be giving him the 5 year option as he can barely afford the rent, let alone outgoings which remain unpaid for over a year. The last straw was when he tried to burn the restaurant to collect insurance money - passers-by had to call the fire brigade as his staff watched the flames! It was a bad mistake to let him in in the first place. He managed to fake his way into persuading us that he had previous restaurant experience and our trust was misplaced.

We have found a new prospective tenant with a good track record. But she doesn't want to sign a proper lease as we have always done with the others over 30 years. "Just copy the old lease and change the names" she says.

I'd appreciate any advice on leases and any clauses we should put in to protect my elderly parents. Rent from this restaurant comprises their entire income and we want security and continuity - we don't need folks who come and go or run the business down.

On-topic advice appreciated.

If your parents are elderley, would it make sense to sell the property and them live off the proceeds? Maybe it's not quite as lucrative, but at least they wouldn't have the stress of further potential problems with a bad tenant?

 

[cu@thetop]

You'll get more with a good tenant and solid lease in place.

Proper lease is vital.

 

[bobbiemenzies]

If your parents are elderley, would it make sense to sell the property and them live off the proceeds? Maybe it's not quite as lucrative, but at least they wouldn't have the stress of further potential problems with a bad tenant?

Not interested in selling - why would we? All we want is a good, long term tenant and the security of an income. What purpose to sell it and watch the proceeds gradually evaporate when we can hang on to it and watch it grow in price as it yields a decent rent.

On topic advice on leases etc appreciated.

 

[Peter_Tersteeg]

I attended a very interesting presentation from a commercial property lawyer last night. Having a better understanding of what lawyers bring to the table in terms of commercial property, I now have a better understanding of the value they bring to either a purchase, sale or lease.

I'd suggest your parents start there, I can pass on the details of the lawyer if you like, he's based in Melbourne.

 

[fokas]

If your parents are elderley, would it make sense to sell the property and them live off the proceeds? Maybe it's not quite as lucrative, but at least they wouldn't have the stress of further potential problems with a bad tenant?

Short answer: No.
Me thinks they would then have the stress of their capital being eroded away.

 

[bobbiemenzies]

We want the security of a lease through a lawyer. The standard lawyers lease hasn't helped us much over the years. What sort of things should we put in the new lease?

 

[cu@thetop]

Good rent. Pay outgoings. Good "make good " clause. Rent review- take a punt cpi or fixed with market review on the option. Rental guarantee 6 months (or at least 3). Director's guarantee.

Credit check and the like on incoming tenant.

Find a good Melb lawyer. Who knows- tenant may even be responsible for the fees!

 

[Aaron Sice]

if you just let any old joe into a property on a standard or unsecured lease then you might as well sell it now.

why ON EARTH would you take a tenant's suggestion as to the way you lease your property?

if you're contemplating it, i suggest you sell NOW and move onto another investment class before you get burned (pardon the pun).

 

[Propagate]

Not interested in selling - why would we? All we want is a good, long term tenant and the security of an income. What purpose to sell it and watch the proceeds gradually evaporate when we can hang on to it and watch it grow in price as it yields a decent rent.

On topic advice on leases etc appreciated.

The only reason I mentioned selling was that you say your parents are elderly. Elderly to me makes me think 'too old to want the potential hassle'. If there were enough equity in it for them to enjoy, then I don't see the problem.

Of course - they may not be all that 'elderly' and selling would see them too short, in which case, fair enough.

Good luck, hope you find a good tenant.

 

[bobbiemenzies]

The property is in WA. All ideas appreciated. Most leases stipulate annual rent increases and the other noteworthy things cu@thetop has suggested. Traditionally our tenants have paid for the solicitors cost for drawing up the lease.

Can anyone suggest any relevant or specific clauses that would apply to a restaurant on a major highway in a high end suburb?

If the new tenant someday sells the business can we charge an admin fee for the lease to be reassigned - its a drain on our time? Can we obtain a guarantee from the seller of the business that he will be liable for the re-asignee's breaches if the reasignee defaults? How is this best worded?

Any other ideas?

Thanks everyone for contributing so far. Please try to be as on-topic as possible.

 

[rugrat]

We have found a new prospective tenant with a good track record. But she doesn't want to sign a proper lease as we have always done with the others over 30 years. "Just copy the old lease and change the names" she says.

Just a bit confused. If you can clear this up I might have some suggestions???

Why doesn't she want to sign a proper lease?

If you copied the old lease and changed the names, then that would be a proper lease, would it not? Am I missing something.


I must say, I wouldn't be letting a tenant dictate terms to me about having a 'proper' lease - it acts to protect BOTH parties. If they are unwilling to sign a 'proper' lease, then i would be questioning whether or not they actually would be a good tenant. (although hopefully not as bad as your last )

 

[bobbiemenzies]

Just a bit confused. If you can clear this up I might have some suggestions??? Why doesn't she want to sign a proper lease?
If you copied the old lease and changed the names, then that would be a proper lease, would it not? Am I missing something. I must say, I wouldn't be letting a tenant dictate terms to me about having a 'proper' lease - it acts to protect BOTH parties. If they are unwilling to sign a 'proper' lease, then i would be questioning whether or not they actually would be a good tenant. (although hopefully not as bad as your last )

I think she will be persuaded to sign a lease and pay for the costs of its preparation. But the thing on my mind is how best to make a proper ironclad lease that protects mum and dad in their old age. When the bad tenant tried to burn the place down, he refused to pay rent for a month that the restaurant was closed. Our lawyers say we can't claim this from the bad tenant even thought he was insured for this sort of thing. Sometimes I think the lawyers were misinformed.. Its great that the bad chap is leaving. But we don;t want similar problems with he new ones.

Anyhow, all ideas appreciated. Keep em coming.

 

[chilliaa]

My elderly parents own an IP that has been a successful restaurant for most of its 30 year history. The restaurant is on a highway in a respectable and decent suburb around 8km from the city.

The latest tenant has run the business down and, thankfully, his lease is almost over - we won't be giving him the 5 year option as he can barely afford the rent, let alone outgoings which remain unpaid for over a year. The last straw was when he tried to burn the restaurant to collect insurance money - passers-by had to call the fire brigade as his staff watched the flames! It was a bad mistake to let him in in the first place. He managed to fake his way into persuading us that he had previous restaurant experience and our trust was misplaced.

We have found a new prospective tenant with a good track record. But she doesn't want to sign a proper lease as we have always done with the others over 30 years. "Just copy the old lease and change the names" she says.

I'd appreciate any advice on leases and any clauses we should put in to protect my elderly parents. Rent from this restaurant comprises their entire income and we want security and continuity - we don't need folks who come and go or run the business down.

On-topic advice appreciated.

Depending on the quality of the fixtures and fittings i suggest two things:
1) try to sell the 'business' as a going concern;
2) require a bond for the value of the fixtures and fittings.

Or on the other hand, ask perspective tenants what 'value add' they are prepared to do to the building. If a tenant is prepared to spend several hundred thousand dollars renovating the place, they are less likely to take a short term attitude. Any agreement should be put in writing.

 

[Player]

Hi bobbiemnzies,

I am unaware of the state laws relating to comm leases in WA, however being a restaurant probably places it under a "retail clasification".

If this is the case and WA is anything like Vic, then don't expect anything "iron-clad". IMHO, retail (and I own one) is little more than glorified resi with tenant paying some outgoings such as water, council and insurance depending on how you structure the lease. They don't pay land tax and there is no provision for ratchet clauses with retail, at least in VIC.

Whatever else you negotiate by way of guarantees (in a restaurant I'd prefer one from their bank than merely a Co Directors guarantee with a two dollar company or a personal one with no assets behind them) will depend on what you negotiate and hinge upon the status of the asset your parents own. It is obviously well located by your description, however there is a big difference between a 150 sq m local bistro and a 500-1000 sqm bistro, bar and a la carte facility.

You need a good lawyer who is familiar with such leases. Don't pay for their learning curve at your parents' expense.

 

[boods99]

Hi bobbiemnzies,

I am unaware of the state laws relating to comm leases in WA, however being a restaurant probably places it under a "retail clasification".

If this is the case and WA is anything like Vic, then don't expect anything "iron-clad". IMHO, retail (and I own one) is little more than glorified resi with tenant paying some outgoings such as water, council and insurance depending on how you structure the lease. They don't pay land tax and there is no provision for ratchet clauses with retail, at least in VIC.

Whatever else you negotiate by way of guarantees (in a restaurant I'd prefer one from their bank than merely a Co Directors guarantee with a two dollar company or a personal one with no assets behind them) will depend on what you negotiate and hinge upon the status of the asset your parents own. It is obviously well located by your description, however there is a big difference between a 150 sq m local bistro and a 500-1000 sqm bistro, bar and a la carte facility.

You need a good lawyer who is familiar with such leases. Don't pay for their learning curve at your parents' expense.

Player,
WA is same in regards to recovery of Land Tax and also ratchet clauses.

Bobbiemenzies,
Player has pretty much hit the nail on the head, good sound advice. You really need to see a GOOD PROPERTY lawyer to draft a Lease that will be relevant to your (parents) situation.
The $2000-$3000 you spend will be well worth it in the long run.

Boods.

 

[Perp]

I agree with boods99 and Player that you'd be better off asking a lawyer who specialises in commercial leasing than us. I mean, I'm sure we can come up with loads of suggestions, but the lease has to be written up by the lawyer anyway, and the lawyer should have seen many more leases than us, and have had more experience in what things can go wrong.

Perhaps somebody can suggest a lawyer experienced in restaurant leases. TPFKAD may be able to help; he's pretty familiar with commercial leases.

 

[cu@thetop]

Hi bobbiemnzies,

. IMHO, retail (and I own one) is little more than glorified resi with tenant paying some outgoings such as water, council and insurance depending on how you structure the lease.

Don't say that to Dazz though

 

[Player]

Don't say that to Dazz though

I think he would agree with me. From what I recall based on what has been shared, he does not own retail. He plays with (BIG) sheds and CBD office floor plates; IMHO far more the polar opposite to the resi to which I allude. He also does own resi and that gave him the catapult to leverage into his concrete boxes.

With tongue firmly in cheek, I consider my retail one as another resi with less outgoings and longer leases. Still at the mercy of market reviews and that impost to the SRO. When I bought it I didn't know what I didn't know.....it has served me well however as it is in a "brand" street. It's just that I wouldn't buy another.

Moving forward, I am also looking at concrete boxes on underutilised dirt with some other criteria to tick........I have digressed

 

[cu@thetop]

Don't get me wrong- I agree. In fact I view retail as better than Resi as there are less restraints under law as regards tenants rights- A tribunal may give a single mother 2 months to vacate her premises, but may be less merciful with a defaulting commercial tenant.

Currently looking at a small mixed use (retail/commercial) opportunity.

If I pick it up I'll share with the forum after the deal is finalized. Seems Dazz's reirement has left a perceived gap amongst forumites so we all need to do our bit