Market Rental Review

[Dazz]

Thought I'd pop down a wee note about one of the issues we are going through at the mo' with one of our IPs, with the intent of starting a discussion.

I'll try to keep it very vague and generic, cos the last time I went into detail it did no-one any good.

The long and the short of it is that the Tenant is about to come up to their "at market" rental review. They have a long lease with us, with a further option thereafter, taking them out a long way if they so please. They are locked in for a long time no matter what and cannot go anywhere.

The Lease alternates every year between a fixed x% increase review, and then a market review. There is a rachet clause in there to protect us so the rent cannot go down.

We just finished the review and sent it off. It was a significant jump in rent compared to what they are paying now. Bonza.

I think I could hear the loud cough from them when they received it.

Funnily enough, the Lease says they only have x days to officially write back to us and formally disagree with the proposed rent level. They failed to do this.....although they did send a letter the next business day saying that they had received our notice and would respond with their answer within due course.

We had a very pensive time, hoping and praying that the burden to respond would be forgotten, and by default, as per the wording in the Lease, they were deemed to have agreed to the rent level.

We finally received a reply from them after they received our notice....still not formally disagreeing with our proposed rent.

It's in the hands of my argumentative solicitor, and I've been busying myself with the exact nit-picky definitions of what a day means, what a notice is, what postage delays are acceptable, whether an email is as good as a fax, what the exact definition of market is, what the exact definition of the word deem means.

All of this word w@nk nonsense unhappily is worth alot to us.....so I cannot simply order the lawyers to sit down and shut up.....however sorely I am tempted.

I don't wish to be forced to work for another year simply because a date on a letter emailed isn't counted or deemed to be served.

The Tenant is somewhat large.....but as it turns out, a tad sloppy on their admin and paperwork. I think we have them in the corner with a knockout blow less than a week away.....but only time and sollys will ultimately determine the outcome.

 

[boomtown]

A good position to be in, nonetheless. Congo Rats.

I hope the office administrator doesnt get fired over that one... !

 

[JIT]

Some questions below in the spirit of discussion...

We just finished the review before Xmas and sent it off. It was a 220% jump in rent compared to what they are paying now. Bonza.

When you determine the ''market rental'', do you need to get an independent person/valuer(s) to formally do this, or do you just make it up yourself (ie. based on your own...possibly biased...information/research of the market) and hand it to the tenant to accept?

Is there anything in the original lease that says exactly how the market rental is to be determined and who determines it?

Surely this can be a bit subjective, eg. same as for rental valuations on RIPs?

Funnily enough, the Lease says they only have 14 days to officially write back to us and formally disagree with the proposed rent level. They failed to do this.....although they did send a letter the next business day saying that they had received our notice and would respond with their answer within due course.

Did you send the notice by registered post or normal post, or e-mail or fax only, or a combination?

Not sure what the legal implications are of the method of delivery of the notice?

(ahh, 2000th post, i'll need to savour this moment!)

 

[boomtown]

Not sure what the legal implications are of the method of delivery of the notice?

Normally its just what is said in the contract. And, I suspect that Dazz will find out (or already knows) to his delight that there is **** all room to try to interpret the word word "deemed".

 

[JIT]

Just an example...

With RIP subject to finance clauses, you can put in the contract ''subject to finance approval in 14 days'' or ''by this date''.

But...you actually get 2 further days after this 14 day point/date to notify the vendor of the outcome of the finance application, even if this is not specifically written in the contract.

Seems to be enshrined in the law, which the solicitors are aware of, and supercedes the contract nitty gritty...

Not sure what it is like for CIPs though?

 

[Dazz]

JIT,

To answer some of your questions....

There is a very specific page in the Lease that details exactly what constitutes valid notice, and the method of delivery, and the timings associated with each method. Fortunately it's quite specific. The wife and I have pored over every single word, going backwards and forwards over the exact legal meaning of every word.

The rental review method, and the steps involved from the initial notice by the Landlord right the way through to final resolution is also spelt out exactly. We've followed the wording exactly, and the Tenant is fortunately trying to wing it, pulling up this nonsense about negotiation.....that won't cut any mustard.

The lease stipulates that if the matter is unresolved prior to the date of invoicing, the Landlord is to invoice as if the proposed rent is agreed, and the Tenant is liable to pay the higher rate until such time as it is resolved. This is good for our cashflow whilst we argy-bargy.

The proposed rent is simply proposed by the Landlord, and it is up to the Tenant to dispute it within the timeframe allocated otherwise what was proposed is deemed to be final and binding. This is where we are at right now.

If they had of formally disagreed within the timeframe allocated, and we cannot agree on the rent level, then a valuer is appointed, and they act as an expert to determine the rent level. No argy-bargy is tolerated from either side. I'm OK with this.

The Tenant's Office administrator may well get a chewing over this.....although they are a big company. I guess if we get this through, a big lesson learnt will be passed on, and they won't make the same mistakes with their other Landlords.

Anyway, it's all interesting....to the wife and I at least. If we get it through, we've both agreed we're going to immediately book a cruise and take 3 weeks off. The rest of the portfolio can go swing for a while.

 

[peteb]

it sounds like the lease is very specific and so it should be.

no room for either side to assume/bend/change any of the details.

they have been slack in responding, they have come back from holidays and have gone 'jesus the rent has gone up ... gone up a lot'.

they are in defence mode and are tying it on to buy some time and hopefully come out of the 30 days with a rent increase of 100% not 220% .... for then it's worth a try.

in the end the soliciotrs and the lease will determine the outcome.

I will stay tuned for the next installment .....

 

[PrimeCommercial]

.........The wife and I have pored over every single word, going backwards and forwards over the exact legal meaning of every word.

I remeber reading another of your posts where you said you wirte all of your own leases. How did you become confident in preparing your own? do you have a solicitor look over it for you? Have you just amended a standard lease to your liking or started from scratch? Sorry for the inquisition.

in the end the soliciotrs and the lease will determine the outcome.

and maybe several thousands of dollars in legal fee's. Lets hope not

 

[Ajax]

I'm a little confused here.

If the lease is set at market rent every second year, with 5% increase every other year how is it the market rent has jumped so much from the previous 2 years?

I think sometimes you need to view the rent position from the tenants perspective...how easily can their business afford the rent increase, what trading conditions are likely for their business over the next few years.

 

[eternit]

In the new lease is the rent at market level or way over market level?

If its way over market level, in my opinion it is morally wrong to put something like that in a contract and hope they dont answer back in the given timeframe so the over market level rent needs to be payed.

Just my opinion......

 

[Dazz]

it sounds like the lease is very specific and so it should be.

Agreed - it is surprisingly specific.

no room for either side to assume/bend/change any of the details.

Exactly - any room for argy-bargy just costs thousands in lawyers fees while they fight and squabble. Clear cut and defined. So what if the agreement runs to hundreds of pages - just so long as there is no room for question or dispute or worse still "interpretation".

in the end the solicitors and the lease will determine the outcome.

yes - it's too valuable not to get right.

 

[Dazz]

I remember reading another of your posts where you said you write all of your own leases. How did you become confident in preparing your own? Do you have a solicitor look over it for you? Have you just amended a standard lease to your liking or started from scratch?

Hi shady,

I paid a solicitor handsomely for the tightest Lease wording that I could find / pay for. I've then "road-tested" it over the years with various Tenants, modifying each one in the Landlord's favour every time they managed to dodge their responsibility.

I've also had my Mentor go through it with a fine tooth comb, along with 3 fairly senior investors and two separate solicitors.

All of that review has resulted in a fairly water-tight document, that resembles little of what I paid for initially. I think I am up to version # 12.


This Lease wording however we are talking about with this property, was inherited when we purchased it. The Tenant was already there, so I have had zero input into this Lease.

In terms of where do you learn this stuff. Hours studying law books, Acts, precedents, actual trials and tribulations where tenants wriggle out of their obligations and of course talking with other investors.

But mostly, the sacrifices made of simply reducing my television viewing hours has paid handsome dividends.

 

[Dazz]

If the lease is set at market rent every second year, with 5% increase every other year how is it the market rent has jumped so much from the previous 2 years?

Hi Ajax,

We have experienced extra-ordinary growth in the rental market. Landlords up and down the CBD have enjoyed huge growth in rents to bring the yields back to normal after big jumps in asset prices. I'm simply a small fish swimming along in a very strong under-tow.

Lots of demand. Almost a fixed supply. It takes 3 or 4 years for the full process to slap up a new office tower. The lag times hurt.

I think sometimes you need to view the rent position from the tenants perspective...how easily can their business afford the rent increase, what trading conditions are likely for their business over the next few years.

My Tenant is fairly big. The chicken feed they flick me to accomodate their operations wouldn't even register on their tracking systems.

To the wife and I however, it means freedom.

 

[Dazz]

In the new lease is the rent at market level or way over market level?

If its way over market level, in my opinion it is morally wrong to put something like that in a contract and hope they dont answer back in the given timeframe so the over market level rent needs to be payed.

Hi eternit.

By definition - it's a market rental review within an existing Lease. It's not a new Lease.

In terms of morals, this is my opinion.

I'm an investor. I own a box. They wish to rent the box. I've never met them, they've never met me. I don't wish to have a relationship with them, and they have no desire to have a relationship with me....most people don't I find.

It's very difficult for me to think about morals when you are discussing a lump of concrete in a windy street, negotiating via solicitors with nameless and faceless superannuation fund managers.

They have certainly had no moral problems renting my box for next to nothing over the past X months whilst the market went nuts. I had to put up with the low rent and fork out a high mortgage. The rent is simply elevating up to what is market. At no point do I ever get it above market.

I suppose that's why I invest in these emotionless concrete boxes - because I don't want to get into all these personal / moral / ethical quandries. If people are involved - I want nothing to do with it.

I invest simply for the highest rental return I am lawfully entitled to.

 

[HiEquity]

I'll try to keep it very vague and generic, cos the last time I went into detail it did no-one any good.

Can you elaborate on that point (without going into detail! )? I occasionally toy with the idea of going into some detail due to knowing how helpful it is when others do that but there are a number of unknown risks associated with such that make it rather difficult (I don't know what I don't know - that sort of thing...). How (at a high level, with broad brush strokes) did you come a cropper?

Looking forward to more vague, generic, unspecific and wide ranging generalisations....

 

[boomtown]

Im with Dazz.

They are big boys and can take care of themselves. Or rather, could take care of themselves if they took the care to care.

 

[Dazz]

I will stay tuned for the next installment .....

Well, the next installment has occurred.

Obviously the Tenant's personnel have come back from the Xmas and NY holidays blissfully unaware of what has happened over the break, and now find themselves in a bit of pickle.

There has been a flurry of letters and just very recently emails trying to patch up a complete schmozzle on their side of their contract obligations.

Had a pretty stressful (but wide awake) day nit-picking the 65 page contract with the solicitor. Agreeing and going thru all of the argy-bargy over exact legal definitions of words again. A huge learning curve once again.

What is a valid notice. What is a day. What does serve really mean. What does deem really mean. What happens if a date is missing from a letter. Does a notice need to be signed. What proof do we have that we are the Landlord ? Is it valid to deliver the notice to any officer of the Tenant, or does it need to be a specific person, and if so what rank ? How fast does the postal system work, or deem to work.

I needed to put the Tenant's solicitor's hat on for the day and try and tear all of our arguments to shreds. It was difficult to do, to play devil's advocate. Any nit-picky little squirrel whingy thing was raised. Did we have a defence for each and every one. If so, what was it, and then let's start ripping that to shreds as well. When all the ripping and tearing was complete - what was left ??

The difficult thing was taking about 6 steps back from the action and pretending to approach the issue from a complete strangers perspective - cos that's what a magistrate or judge in the Supreme Court will eventually do if my Tenant wants to take it that far.

I'm too close to the action at the moment. Asking questions like "Am I the Landlord and how do I prove it" never would have crossed my mind. Hard to give a valid rent review notice as the Landlord if you can't prove you are the Landlord....

Learning learning learning. Six lessons were learnt yesterday that shall be incorporated into any future Leases or extensions of existing Leases to bolster our position. Version # 13 of our Lease will be stronger. God help any Tenant who signs it.

Biggest lesson I learnt yesterday was that being 99.5% sure is not good enough.

Distilled everything down into a 4 page letter, ran it past the wife for her input and agreement, and then authorised the solicitor to fire it off to the Tenant yesterday. We "feel" they haven't got a leg to stand on, but we certainly aren't counting our chickens yet. Our Tenants could easily afford to employ a team of solicitors to argue with us for years.

When trying to bring down an elephant, I'm wary not to get squished in the process.

One of two results are expected.

1. Tenant admits they have been tardy, dropped the ball and capitulates. End result - our financial freedom.

2. Tenant fights it all the way, and we are forced to submit to a market review determined by the President of the API. End result - probably 85% of our freedom and I'll need to work for another two years.

To dodge two years of work, I'm ready for a bingle.

 

[Asset]

I find this thread really amazing how ignorant many are here.

RE: MARKET REVIEW

The lease is a contract, yeah it has a ratchet clause, big deal. But if market rates per square metre are declining "Market Review" will reduce the rent.If the tenant does not agree with what the landlord proposes, as with any formal lease the tenant has a right to obtain an independent retail valuer. BTW ratchet clauses are not allowed in some states with retail tenants/leases. Market Reviews are only good in a rising market, however in a declining market it can lead to reduced rents and the landlord cannot do anything about it.

 

[turk]

I find this thread really amazing how ignorant many are here.

RE: MARKET REVIEW

The lease is a contract, yeah it has a ratchet clause, big deal. But if market rates per square metre are declining "Market Review" will reduce the rent.If the tenant does not agree with what the landlord proposes, as with any formal lease the tenant has a right to obtain an independent retail valuer. BTW ratchet clauses are not allowed in some states with retail tenants/leases. Market Reviews are only good in a rising market, however in a declining market it can lead to reduced rents and the landlord cannot do anything about it.

Hi Asset

Maybe in your contracts

Cheers

Pete

 

[Asset]

Umm wow in most commercial lease contracts. Especially retail.

In this declining market, commercial tenants will be looking to down size. I would suggest to waiver the review or apply a CPI review and let the rents remain as current status. OR otherwise empty buildings have a habit of producing no incomes. Ahh gees Melbourne is immune to recessions, I forgot.

BTW I have done this game for years.........good luck, I'd rather keep tenants than have empty buildings. Have a look at the UK, thats we are heading