Investing in commercial real estate can be an exciting and rewarding journey, especially in a dynamic market like Perth. However, achieving success in property investment is more than just returns. It’s important to know that, as landlords, making strategic decisions can protect your assets long-term.
As a commercial landlord, you’re likely to understand the risks associated with tenant insolvency. It can be challenging, leading to the loss of rental income, make-good costs, and unfunded outgoing commitments. In some cases, it can even cause a decrease in property value and reduced foot traffic.
Explore the key considerations and proactive measures that investors like you should consider.
Understand the lease terms.
Having a thorough understanding of lease terms is essential when it comes to property management. A lease agreement is not just a formality but a complex contract that outlines landlords' and tenants' rights, responsibilities, and expectations.
This knowledge is particularly crucial for landlords, as it forms the foundation for a robust strategy to protect their rights and interests. From durations, notices, and timeframes to maintenance responsibilities, having a good grasp of lease terms allows you to set clear expectations, prevent potential disputes, avoid missing deadlines, and ensure the smooth operation of your commercial property.
Recognise impending insolvency
Landlords must be able to recognise the signs of approaching insolvency in their tenants so that they can take appropriate measures to protect their interests.
When tenants encounter financial issues, landlords can take proactive steps to avoid potential losses. These measures may include negotiating deferred payments, offering temporary waivers for specific lease terms, especially those related to fixed rent clauses, and obtaining additional financial guarantees.
All of these actions can help tenants during financially challenging times. In extreme cases where insolvency is imminent, landlords may consider terminating the lease early. By being proactive and well-informed, landlords can navigate financial uncertainties and mitigate risks to safeguard their investments in the dynamic landscape of property management.
Understand the various insolvency types.
Landlords need to understand different types of insolvency to protect their interests.
For example, a Business Improvement Area (BIA) Proposal refers to situations where tenants can continue their operations under the guidance of a Proposal Trustee. During this process, landlords have the right to oppose any proposed changes to the lease.
On the other hand, Companies’ Creditors Arrangement Act (CCAA) restructuring involves court-led restructuring that offers tenants more flexibility and control. In this case, landlords' objections are also taken into consideration.
Knowing and understanding these differences can help landlords navigate challenges more effectively and make informed decisions in various insolvency scenarios.
Take swift actions
Landlords can benefit from using tools like letters of credit to speed up the process of accessing owed payments and claiming against guarantors when necessary.
Prompt communication with both tenants and court officers is crucial for transparency. Filing timely claims is essential to ensure landlords retain their voting rights and claims during insolvency proceedings.
Landlords should have contingency plans for potential lease changes to ensure efficient property use amid evolving circumstances. By taking swift and informed actions, landlords can navigate financial challenges effectively.
Dealing with tenant insolvencies can be overwhelming. That's why working with a property management agency can be key. If you're seeking a property manager with knowledge of commercial management, contact Rent Choice today!
Get in touch with us. Elevate your commercial property management with the help of our experienced team.
Ormsby, G. (2023, October 26). Minimising the biggest risk for commercial property owners. https://www.realestatebusiness.com.au/commercial/26747-minimising-the-biggest-risks-for-commercial-property-owners
Rylands, K and Provad, M. (2021, February 3). Best Practices for Commercial Landlords Facing Tenant Insolvencies. Best Practices for Commercial Landlords Facing Tenant Insolvencies - McMillan LLP
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