The three Biggest Mistakes of a landlord.

There are lots of opportunities for things to go wrong when drafting a lease but, in these three situations the consequences are particularly unpleasant.1. Failure to obtain a personal guarantee. Most leases are signed in the name of a company. If a tenant manages to get a lease in the name of a two dollar company and the requirement for a personal guarantee is forgotten then there can be some ugly consequences. The tenant can walk away without fear. There is little point in suing a two dollar company but, a two dollar tenant may still make a nasty claim against a landlord and the landlord won’t even be able to recover legal costs.

2. Rent Free Period.  We have seen a number of leases over the years where a rent free period is not properly drafted.  The unfortunate result in these particular cases was that the tenant received the rent free period more than once. This can happen for instance upon the exercise of an option. When an option is exercised all terms are repeated including the rent free.  An effective clause is required to stop this from happening. In the case we are referring to the mistake was discovered when the landlord tried to sell the building. The buyer terminated the sale and the landlord was left with the problem.

3. Failure to control assignment. If a landlord does not include effective assignment provisions then the landlord may soon enough be leasing to a tenant they didn’t approve and don’t know.  Corporate tenants add an extra layer of complexity.  If a corporate tenant wants to avoid an assignment of the lease the controllers may instead assign their shares  in the company, the lease itself need not be assigned. This loophole must be closed by an effective clause.

PPSR – While we are mentioning risks for landlords it is necessary to mention again risks associated with the Personal Property Security Register. Many people do not understand this legislation. Even after reading about this historic change many will not be able to believe and appreciate that – it doesn’t matter if you own an asset! Ownership of an asset is not enough to prevent loss of the asset if your tenant becomes insolvent. An owner can lose ownership of an asset if that ownership is not registered.  For example, if a landlord allows a tenant the use of the landlords equipment, a liquidator is entitled to take that equipment if the tenant becomes insolvent.  Owners of personal property, that is in the possession of another, must register.

Riba Business Lawyers

Strength Through Knowledge

Franchising, Leasing, Acquisitions

Head office:  34 Duporth Avenue, Maroochydore, Sunshine Coast, Queensland.

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