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Commercial Property

 

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.


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