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Unpaid rent and outgoings: issues for Landlords to consider in commercial leasing

Often the owner of a commercial property (“landlord”) is left chasing unpaid rent, outgoings and other expenses from a tenant.

Before taking steps to end the commercial lease and re-enter possession of the property, a landlord should be aware of its rights under the lease agreement.

 

Some of the issues the landlord must consider are:

  • What amount is outstanding and when was it due?
  • Has there been any demand for payment?
  • Is there any dispute in relation to the outstanding debt?
  • What does the lease say about failing to pay rent, outgoings and other expenses?
  • Is the tenant in breach of the lease?
  • Is notice of the breach required, and, if so, how much notice is required?
  • What is the process to evict the tenant?
  • What are the consequences of re-entry by the landlord?
  • Is timing an issue?
  • What property would remain in the premises if the Landlord re-entered and took possession of the premises by changing the locks?
  • What happens next?

 

Generally, a landlord will be required to provide some form of notice to the tenant of its failure to pay any unpaid monies. The type of notice required, and the length of the notice period will depend on the terms of the lease, the type of debt that is outstanding and the applicable legislative provisions.

Section 146 of the Property Law Act 1958 (VIC) (“the Act”) makes it clear that a landlord does not have a right of re-entry until the landlord serves notice on the tenant.  The notice must be in a specific form and must:

 

  • provide details of the breach,
  • explain how the breach can be remedied,
  • state what compensation is required because of the breach, and
  • allow the tenant 14 days to remedy the breach detailed in the notice.

 

The requirements of section 146 of the Act do not apply to failure to pay rent.

A landlord will still be required to provide notice to the tenant demanding the unpaid rent.

Generally, the notice can be in a form of a letter demanding payment of the outstanding rent and advising that if payment isn’t made the landlord has the right to re-enter the premises, change the locks and terminate the lease without any further notice.

The requirements of section 146 of the Act still apply to a failure to pay outgoings.   A tenant can dispute a claim for unpaid outgoings. Generally, such disputes are dealt with by the Victorian Civil and Administrative Tribunal.

If a tenant is in arrears with both rent and outgoings, and the landlord wants to remove the tenant from the premises, the landlord may wish to issue a simple demand for the unpaid rent, rather than serve a section 146 notice for both amounts.

The fact that a landlord does not serve a section 146 notice does not prevent the landlord from separately recovering the outgoings.

Once the landlord has re-entered and taken possession, it can still choose to embark on litigation to recover all outstanding monies. This is an entirely separate process.

If a landlord does take possession of the premises, there are rules about dealing with the tenant’s property that was on the premises when the landlord took possession.

The rules relating to commercial leases are complex.  A landlord should seek legal advice before terminating a lease and attempting to re-enter and take possession of its premises.

 

If you have any questions regarding a commercial leasing matter, please contact Konnie Lontos.

By |December 13th, 2017|Uncategorised|0 Comments

Landholder Duty and Death

Where a private company or unit trust owns real estate with a value of $1 million or more then duty may be payable when there is a change in shareholding or unit holding. If duty applies it will be chargeable at the rates applicable to land transfers.

Duty will be chargeable where the acquisition of shares or units amounts to a ‘relevant acquisition’. In general terms, where the acquirer owns 50% or more of the ordinary shares in the company after the acquisition (20% for unit trusts) then the acquisition will likely be subject to duty.

The provisions can also apply where a shareholder or unit holder dies and as a result their shares or units pass to a beneficiary. Although an exemption from duty can apply a Landholder Acquisition Statement must still be completed and lodged with the State Revenue Office within 30 days of the relevant acquisition occurring. An application for exemption from duty should also be made.

The landholder duty provisions are complex. Whenever there is a change in the shareholding of a company or unit holding of a unit trust they must be considered, including where a change occurs due to death. We can help clients lodge the correct forms and apply for an exemption from duty. If you require assistance with this please contact Rob Warnock.

By |December 13th, 2017|Uncategorised|0 Comments

ATO ruling says penalty tax may be payable on holiday homes owned by trusts

According to the recently released TD 2017/20 a family trust that owns a holiday home will be liable to pay family trust distribution tax (FTDT) at 47% where friends of the family stay in the holiday home.

 

How can this arise you may ask?

A trust may make a family trust election (FTE) for a number of different reasons including:

  • to assist it in claiming prior year losses and debt deductions;
  • to allow beneficiaries to claim franking credits on franked dividends distributed to them; and
  • to help pass the no change in underlying economic ownership requirement in the new small business restructure roll-over relief.

If a trust has made a FTE then any ‘distribution’ of income or capital to a person who is not a member of the primary individual’s family group will be subject to FTDT.

 

What constitutes a distribution?

The definition of distribution to a person is expanded in section 272-60 and includes paying or crediting money to the person, transferring property to them, allowing the person to use the trust’s property and releasing or forgiving a debt owed by the person to the trust.

Prior to issuing TD 2017/20 the ATO essentially took the view that FTDT was only payable where a distribution was made to a person who was a ‘beneficiary’ of the trust but was not a member of the primary individual’s family group. It did not, however, apply to persons who were not beneficiaries. For example, where a trust writes-off a trade debt owed by a person who is not a beneficiary of the trust – refer ATO ID 2012/12 (now withdrawn).

The ATO has now changed its view. In TD 2017/12 it says that a person who is not a beneficiary of the trust is capable of receiving a distribution for the purposes of section 272-60 and the trust losses rules.

According to the ATO where a person who is not a beneficiary receives a benefit from a transaction of the kind described in section 272-60(1) that benefit is a distribution to the extent that its amount exceeds the amount or value of any consideration given in return (refer section 272-60(2)). For example, where a family trust allows friends of the family to stay for free in a holiday house owned by the trust.

 

The business exemption

Fortunately, where the trust carries on a business and the relevant transaction occurs on arm’s length terms and is an ordinary incident of the business the ATO will infer that the amount of the benefit does not exceed the amount of consideration given in return. As a result no FTDT is payable. This would apply to benefits given to employees, gifts to suppliers as well as discounts provided to customers.

But if the trust is not carrying on a business and is just an investment trust then this is where the ATO’s change of view will catch unwary taxpayers. The ATO provides the following example in TD 2017/12.

 

Example 2 – use of holiday home, not an incident of a business

The Wonder Family Trust has made an FTE and Diana Prince is the specified individual. The trust owns a holiday home. The holiday home is used by Diana’s friends, for no consideration, for four weeks in the year.

This transaction is not on arm’s length terms nor an ordinary incident of a business being carried on by the trust. As no consideration is given in return for the use of the property, the full value of that use is a distribution within the extended meaning of ‘distributes’.

As a result the trust must pay FTDT on the value of the use which presumably will be the amount the trust would have received if Diana’s friends had paid an arm’s length rent.

 

As a result of the issue of TD 2017/12 advisors need to take extra care where a trust has made a FTE. If you believe this information may impact your clients, it would be prudent to seek advice. Please contact Rob Warnock if you require advice.

By |December 13th, 2017|Uncategorised|0 Comments

Estate Planning When Entering or Exiting Relationships – Are All Things Equal Between Married and De Facto Couples?

No matter what your view is on the marriage equality debate, understanding the rights of a married couple compared to a de facto (including same sex) couple is critical to enable a meaningful discussion with clients who are entering or exiting relationships about their plans on death and incapacity.

 

The difference between proving a marriage and a de facto relationship

At the very core, marriage is based on a couple’s mutual promise to one another and need only be proved by the production of one document (a marriage certificate) at most. It is immediate and undeniable.

A de facto relationship must be proved by evidence relating to living arrangements, sexual relationship, finances, ownership of property, etc. It often requires one or both partners to spend significant amounts of time, money and unnecessary stress to produce the necessary evidence.

Although most states allow de facto couples to register their domestic relationship a prescribed set of criteria must be met to allow the registration.

Interestingly, couples do not need to prove any of the above criteria to enter into a marriage and, in fact, may choose to not share any during their relationship.

 

Differences for estate planning

Although estate planning laws differ in each jurisdiction, marriage usually revokes a Will whereas entering into a new de facto relationship does not. So if, for example, a person made a Will, then entered into in a de facto relationship and then died, the Will would remain valid. The de facto partner would have a right to make a claim against the estate, if the Will did not make sufficient provision for them.

Similarly, divorce (but not separation) will usually revoke any gift made in a Will to the ex-spouse whereas ending a de facto relationship will not revoke gifts made to the former partner.

Married and de facto spouses have an entitlement to a portion of a deceased’s estate if the deceased dies without a Will however a de facto partner must prove their relationship before becoming entitled. This can be a challenge for the de facto, especially where the relationship was not a long continuous one or where the parties did not live together at all times.

The laws relating to powers of attorneys differ from those applying to Wills in several critical ways. For example, if a person nominates their spouse (whether de factor or married) as medical and financial attorney, and the relationship subsequently breaks down, the appointment still stands. For this reason, if you have a client whose relationship ends, it is important to prompt them to immediately review their powers of attorney as well as their Will.

 

If you would like assistance in helping clients entering or exiting relationships prepare or update their estate planning documents please contact Bernie O’Sullivan or Thalia Dardamanis on 1300 267 529.

By |September 28th, 2017|Uncategorised|0 Comments