Our firm prides itself on its commercial and retail lease documents and we believe everyone should have one in place for any business premises (whether you are a landlord or a tenant). Recently, we came across a very good example of why having a lease is so valuable. Here is a summary of what occurred:
- A new client came to us to assist them sell their large commercial property. After a sales campaign the agent found a number of potential buyers.
- The successful bidder offered the highest price which was several million dollars – the buyer was a developer who intended to demolish the building and develop the site.
- The property was strata titled and had multiple tenancies.
- Over the years, the seller had never arranged for any of the tenants to sign lease documents. As a result, all of the tenants were considered to be on month to month tenancies.
- As a condition of the purchase, the buyer needed documentary evidence that the tenants were on month to month tenancies (because they wanted to have the tenants vacate after settlement). If any of the tenants claimed after settlement that they were on a fixed term lease, this would have caused major issues for the buyer who wanted to demolish the building.
- The seller could not provide any documentary evidence for any of the tenancies (because there were no signed leases). In the absence of lease documents, the buyer demanded the seller get a letter from each of the tenant’s confirming that they were only on month to month tenancies.
- The seller was afraid that by doing this, the tenants would be concerned about their tenancies and would seek alternative premises elsewhere. If the buyer decided not to proceed with the purchase, the seller could potentially be left with a vacant building and no rental income.
- The seller refused to get the letters signed by the tenants and the purchaser refused to purchase the property. The deal fell apart and the seller was left to negotiate with the next potential buyer who offered half a million dollars less than the first buyer.
If the seller had lease documents in place for each tenancy, this issue would not have arisen, and it is likely the property would have been sold to the first buyer. Having lease documents would potentially have resulted in the seller being $500,000 better off.
What is the value of a lease document? We would argue it is half a million dollars in this case!
