Options in Development – Part 4 – Examples

Over the past three articles from Andrew Pine lawyer, we have discussed the different forms of Options. We have explained the reason why an Option Fee is often required. We have also uncovered what a Due Diligence clause is and how it protects a Buyer. We have then discussed how a Security Deposit functions. Finally we have explained when a Development Approval clause may be required.

Andrew Pine lawyer will now outline a couple of real-life examples used in the property development world. This should provide you with a practical understanding of how an Option functions and also how it can be used to benefit you from a legal and financial perspective. As has been continually explained to you throughout this series – you must obtain legal advice tailored to your specific circumstances before engaging in any form of Option arrangement. It is essential that you do not sign any Option documentation before obtaining this tailored legal advice. Andrew Pine solicitor can advise you on Option Agreements and can be contacted on the details found at the bottom of this article.

Finally, these real life examples should only be considered as examples. They are not legal or financial advice as to how an Option arrangement should be structured. They are solely used to explain how an Option agreement may be structured. This is to solely provide you with an understanding as to how the mechanics of an Option can function. Please do not rely on these examples without engaging a suitably qualified solicitor and accountant.

 

Example 1 – A Call Option with a Due Diligence Condition

James owns a large ‘old Queenslander’ in Brisbane. He is about to put his house on the market. An investor approaches him offering to pay him the market value of his property ($700,000), thereby avoiding the need for James to pay Agent’s commission.

The catch is that the investor wishes to determine what he can rent each room out in the house for before committing to a Contract to buy the Property. The investor will take two weeks to determine this and he can then commit to the deal. As this is not a long period of time, James agrees to this arrangement. The investor will then have a further three weeks to discuss this purchase with his bank to ensure he can borrow enough money to buy the property. After which the investor must either commit to purchasing the property at the fixed price by signing an unconditional contract, or walk away.

What is one way this deal could be structured?

One way this deal could be structured is by way of a Call Option with a Due Diligence condition. Firstly an Option Fee could be paid by the Buyer to the Seller for giving the Buyer a right but not the obligation to purchase the Property. This is likely to be a smaller amount, given the Option will not be for very long. The Buyer may then have a Due Diligence clause giving it two weeks to determine what it can rent each room out for so as to clarify whether the investment will be a good one. Once this Due Diligence Period ends, the Buyer could then have a further three weeks under the Call Option Period to determine whether its bank can lend it the requisite funds. If the bank cannot, the Buyer can therefore elect to not exercise the Option, thereby allowing the Call Option Period to expire and the Option now being over. The Buyer is not forced to purchase the Property as there is no Put Option.

This is of course one of many ways this deal could be structured. Again, please do not structure deals without contacting a solicitor suitably qualified to advise you on Options. Andrew Pine lawyer is an experienced solicitor who can advise you on Options and your circumstances.

 

Example 2 –  A Put and Call Option Agreement with a Security Deposit and a Development Approval Condition

Sandy owns a vacant piece of land. She is considering selling the property but is not in a hurry. A developer has approached her and wishes to purchase her land for $700,000.00. Sandy is ecstatic as her land is only worth $650,000.00 at the current market rate. The developer is only willing to pay a price over the market rate because he can see the potential in subdividing the land (a form of development). This will take some time to confirm with the local council and the developer wants to ensure he is not forced into buying the land if the local council does not approve his request to subdivide the land.

The parties have agreed to enter into a Put and Call Option Agreement with a Development Approval condition.

The developer could therefore pay Sandy a small Option Fee (let’s say $1,000.00) for her signing the Option Agreement. This Fee is non-refundable so Sandy can spend it now if she likes. The developer may also pay Sandy a $10,000.00 Security Deposit at the same time. If the developer proceeds to buy the land, the $10,000.00 forms the deposit so is part of the price paid ($690,000.00 would therefore be due at Settlement rather than $700,000.00). The developer could then have a certain period of time (often at least six months) to contact the council and obtain development approval from it to subdivide the land how the developer wishes. This is called a Development Approval clause. During the Development Approval Period, the developer is able to terminate if it does not receive satisfactory development approval. It may (or may not, depending on how the Option is structured) be entitled to receive the $10,000.00 Security Deposit back from Sandy if it terminates the Option under this Development Approval condition.

Should the Development Approval condition be satisfied, the Call Option Period may still have a period of time to run. During this time, the developer may exercise its right to purchase the land. If it does not exercise this right by the end of the Call Option Period, the Put Option Period will then commence. Sandy will then have the right to force the developer to buy at the fixed Price.

This are numerous examples of how this arrangement could be structured. You must not enter into Options without contacting a solicitor experienced in Options. Andrew Pine solicitor can advise you on Options and draft any form of agreement you require.

 

The above two examples show how Call Options and Put & Call Options work with Due Diligence and Development Approval conditions. The above two examples also demonstrate how Call Option Fees and Security Deposits function. You must not substitute these examples for financial and legal advice.

 

Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

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Options in Development – Part 3 – Terminology (2)

This article builds on our previous discussions regarding the terminology used in the option sphere. You are now aware of why a Seller requires an Option Fee. You are also aware of how a Due Diligence period works. Today we will build on this knowledge by discussing the Price, Security Deposit and Development Approval conditions. In our final article in this series from Andrew Pine lawyer, we will put this information together to run through examples of how options work in the real world.

As has been outlined throughout this series – these articles should not be substituted for legal advice. You should never enter into an option of any kind before discussing this matter with a lawyer. Andrew Pine solicitor acts for numerous clients who regularly enter into option agreements. Andrew Pine lawyer can therefore be contacted on the details contained in this blog should you wish to receive legal advice that is tailored to your personal circumstances.

 

Price

When a Buyer enters into a Call Option Agreement (or a Put & Call Option Agreement which is conditional on Due Diligence and/or Development Approval) they are obtaining the right but not the obligation to purchase the property. As discussed in our previous article from Andrew Pine solicitor, the Buyer will usually pay an Option Fee to the Seller for obtaining a right which does not come with a corresponding obligation to buy. More importantly, the price payable if the Buyer elects to proceed with purchasing the property must be agreed between the parties at the outset.

Because the price is fixed from the beginning, the Buyer wields a lot of the power. After signing an Option Agreement with the Seller they could contact other parties (such as developers) and obtain a price which is higher than that agreed to with the Seller. The Buyer could then assign its rights under the Option to the third party for the margin (the difference between what the Buyer is obliged to pay the Seller and what the third party is willing to pay for the property). This process can often be carried out without the Buyer having to pay transfer duty as the Buyer usually never owns the property at any point in the transaction.

The price agreed to between the parties is payable at Settlement. However part of the deposit can be paid beforehand, usually as a Security Deposit. Andrew Pine solicitor is experienced in advising a wide array of people dealing in Option Agreements. If you would like advice on options, please contact Andrew Pine lawyer on the details provided at the bottom of this article.

 

Security Deposit

Under a usual Contract to purchase a property, a Buyer pays a deposit to the Seller to demonstrate that they are genuinely interested in purchasing. Any deposit they pay is attributed towards the purchase price, leaving the remainder payable at Settlement. The same is often true with Option Agreements. A Buyer under an Option usually pays a Security Deposit to the Seller, with this amount being subtracted off the price due at Settlement. How much is paid, when it is paid and whether these amounts are refundable should the Buyer elect not to proceed with purchasing the Property are all up for negotiation between the parties.

It is however common for part of a Security Deposit to be payable up front (at the same time as the Option Fee is payable). Another part of the Security Deposit may then be due when the Buyer confirms to the Seller that it is satisfied with its Due Diligence enquiries and/or it has obtained satisfactory Development Approval (if relevant). As noted above, any Security Deposit paid is then attributed towards the price payable at settlement, rather than an Option Fee which is merely a fee paid by the Buyer to the Seller for entering into the Option Agreement.

It is essential that you obtain tailored legal advice regarding Option Agreements and Security Deposits. Andrew Pine solicitor can advise you on these items regarding your individual circumstances. You can contact Andrew Pine lawyer on the details below.

 

Development Approval

Many Buyers enter into Option Agreements because they see the potential in the Property. The Property may have potential to be subdivided into smaller Lots, or be amalgamated with adjoining properties to form one bigger Lot. Alternatively, the Property could be changed from fee simple (free standing land) into strata (apartments or townhouses). Whatever the reason, Buyers may make an Option conditional upon them receiving a development approval application which is satisfactory to them.

As Councils quite often require the owner of a property to sign development application documentation, a good Development Approval condition in an Option will require the Seller to sign any development application documentation the Buyer puts in front of them.

It is also essential that the Development Approval clause gives a Buyer enough time to obtain the approval. Some councils can take extended periods of time in approving various forms of applications so it is important you check with your town planner as to how much time you will need.

Development Approval clauses are difficult and you should engage a lawyer experienced in Option Agreements. Andrew Pine solicitor is a lawyer experienced in advising clients on Option Agreements and Development Approval clauses. Andrew Pine lawyer can be contacted on the details found below.

In our next article we will wrap this series together by reviewing examples of Buyers and Sellers entering into Option Agreements.

Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

Options in Development – Part 2 – Terminology (1)

As you have already read “Options in Development – Part 1 – what is an option and what forms of options are there?”, you are now familiar with what Call Options, Put Options and Put & Call Options are. There is however a plethora of terminology thrown around in the circle of options which you may need to get your head around if you are to wheel and deal in this arena.

This article and our third article builds on the previous discussion of what an option is by explaining some of the common language used by option traders and property developers. Our fourth article from Andrew Pine solicitor will then tie in these first three articles and discuss how they often function in the real world. These articles do not however substitute for legal advice and you should obtain your own, should you wish to engage in any form of option documentation. Andrew Pine lawyer is experienced in option agreements and can advise you on any option queries you may have. Andrew Pine solicitor can be contacted on the details provided at the bottom of this article.

 

Option Fee

You have probably been wondering throughout this series so far- why would a Seller give the Buyer a right but not the obligation under a Call Option Agreement to buy their property for a fixed period of time at a pre-determined price? If they gave a Buyer this ability without anything in return, they would essentially be giving the Buyer a free kick to potentially buy the property under the market rate. A Buyer would be able to sign up an Option Agreement with a Seller and wait to see if the market value increased above whatever price is agreed, then essentially buy the property for this fixed price which may be below market value. If the market went up, happy days. If the market did not, the Buyer could just walk away. Well here’s the catch.

The Seller often (but not always) requires the Buyer to pay an Option Fee. This fee can either be payable when the Option Agreement is entered into, or over a period of time or when certain milestones are reached. The amount of this Option Fee can be either a high amount or a very low amount, as this is a commercial negotiation to be agreed upon between the parties. If the contract to purchase the property is entered into (either by exercising a Put Option or Call Option), the Option Fee does not necessarily form part of the Price paid by the Buyer to the Seller to buy the Property. It is a separate fee paid for entering into the Option Agreement – i.e. for the Seller giving the Buyer the right but not the obligation to purchase the property at a particular price.

Another aspect of an Option Fee which is up for negotiation is whether these funds are refundable should the Buyer not proceed with exercising its Call Option. As a Call Option Fee can quite often be viewed by Sellers as compensation for the Seller being forced to sell at a price which is locked in, Sellers usually require this amount to be non-refundable so that if the Buyer walks away, the Seller has at least something to show for the inconvenience of entering into an arrangement which ties up the property.

It is however worth noting that Put Option fees may also be payable in the reverse. Given the Buyer may be forced by the Seller to purchase at a particular price, the Buyer may require a certain level of compensation, such as a Put Option Fee.

Finally, Option Fees often incur stamp duty (transfer duty) payable by a certain date. Given there are a plethora of considerations to take into account with Option Fees, it is essential that your lawyer drafts an Option Agreement and gives you advice prior to you signing it. Andrew Pine solicitor can be contacted to draft and advise on Option Agreements.

 

Due Diligence Period

After an Option Agreement is signed up with a Call Option Period (it may even include a Put Option Period), the Buyer may want some further protection – a Due Diligence Period. This gives the Buyer a certain period of time during which it can conduct any investigations of the Property it deems necessary. For example, if the Buyer intends to build a house on the land, a builder may wish to investigate whether one can even be built! The Buyer may also need an Agent to investigate what similar properties in the area are selling for in order to ensure they are buying the Property for a price that works.

In essence, there are an unlimited number of investigations a Buyer can make during a Due Diligence Period. This period usually runs from shortly after the Option Agreement is signed for a fixed number of days by which it is agreed that the Buyer should be able to know enough about the Property to decide whether it wishes to continue with the Option Agreement. If the Buyer does not wish to proceed, it is able to terminate under Due Diligence.

A Primary reason for a Buyer requesting a Due Diligence Period in an Option is where you not only have Call, but where there is also a Put. If an Option Agreement is solely a Call Option, the Buyer could pull out at any time. However, where the agreement is a Put and Call Option Agreement, should the Buyer wish to not exercise their Call, they often cannot terminate, so the Seller may then force the Buyer to buy the Property under the Put Option. Due Diligence is therefore one way the Buyer can terminate should they wish to pull out. Should you wish to discuss any aspect of Due Diligence, Andrew Pine lawyer can advise you on how to protect yourself with drafting an adequate provision in the Option Agreement.

 

The above serves as an introduction to the terminology of Option Fees and Due Diligence. This article does not however substitute for legal advice. It is vital that you obtain legal advice tailored to your circumstances. Andrew Pine solicitor can advise you on Option Agreements with regard to your personal situation.

In our next article we will focus on a Development Approval clause and what is a security deposit. In our fourth article Andrew Pine lawyer will then delve into real-life examples, once the terminology has been explained.

 

Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

Options in Development – Part 1 – what is an option and what forms of options are there?

Many of us have heard of stock options on the share market. Stock options give the buyer the right but not the obligation to buy a particular number of company shares from a seller at a predetermined price within a fixed period of time. If the market price of these shares rises above the predetermined price agreed to between the buyer and seller during this period, the buyer can compel the seller to transfer the shares at the fixed price. This therefore results in the buyer making an immediate gain as they are buying stocks at a price below the current market value. Andrew Pine lawyer does not however offer advice in regard to stock options.

Property options are similar. A fixed price for the property is agreed between the buyer and seller for a certain period of time. The Buyer has the ability to exercise their right to purchase the property during this period of time for this price. But there are a number of terms to familiarise yourself with when dealing in property options. This article is intended to serve as an introduction to the common forms of options which can be used. It is of upmost necessity however that you obtain legal advice in regard to option agreements before you execute them. Andrew Pine solicitor is experienced in acting for a wide range of clients who deal in property options.

As will be noted throughout this article, Option Agreements, whatever their form, have serious and significant legal and financial consequences if not entered into without adequate legal advice. It is therefore essential that you engage a solicitor who can advise you on a particular Option Agreement with reference to your circumstances. Andrew Pine lawyer can be contacted on the details at the bottom of this article.

 

Call Option

A Call Option is a form of option whereby the Buyer has the right but not the obligation to purchase the property at a fixed price during a certain period. This period is called the Call Option Period. If the Buyer exercises the option, it can compel the Seller to enter into a Contract of Sale to sell the property for the agreed price with settlement often occurring shortly afterward. If however the Buyer does not exercise the Call Option within the Call Option Period, they no longer have the right to force the Seller to enter into the Contract of Sale. It is essential to receive legal advice on Call Option Agreements and Call Option Periods. Andrew Pine Solicitor can advise you on Call Options and Call Option Periods.

 

Put Option

A Put Option is a form of option whereby the Seller has the right but not the obligation to force the Buyer to purchase the property at a fixed price during a certain period of time. Sounds like the reverse of a Call Option doesn’t it. Well it is. The period during which the Seller has this right is called the Put Option Period. If the Seller exercises this option, it compels the Buyer to enter into a Contract of Sale to purchase the Property for the pre-determined price with settlement usually happening within a month of this date. If the Seller does not exercise the Put Option within the Put Option Period, they no longer have the ability to compel the Buyer to sign the Contract of Sale. It is worth nothing that while Put Options do occur, it is more common to find a Put and Call Option Agreement, whereby the Buyer first has a right to compel the Seller to sell under a Call Option Period, but if the Buyer fails to exercise its right, the Seller then has a right to compel the Buyer to buy under a Put Option Period. This is often one of the ‘catches’ Sellers add into an Option Agreement to ensure they ‘get something’ out of the deal. If the Buyer changes its mind and does not wish to exercise its Call Option, the Seller may then have the right to exercise the Put Option in some circumstances. Buyers therefore usually attempt to negotiate Call Options, as opposed to Put and Call Options to avoid the scenario where they are forced to purchase. If you are considering entering into any form of Option Agreement, legal advice tailored to your circumstances and the legal documentation is essential. Andrew Pine lawyer is experienced in advising clients on these agreements and can be contacted on the below details.

 

The above article outlines Call Options, Put Options and Put and Call Options. It serves as a general overview as to the rights and obligations provided to both the Seller and the Buyer. Our next article from Andrew Pine solicitor will uncover the terminology used in addition to Call Options and Put Options.

This article should not be substituted as legal advice. As noted throughout, Options (whatever their form) can lead to significant negative consequences if you do not receive legal advice tailored to you prior to you signing them. Andrew Pine lawyer can be contacted on any of the below details.

 

Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

Queensland Commercial Leasing – Part 2

Following on from last week’s Queensland Leasing – Part 1, there are further items for you to consider when negotiating a commercial Lease.

As discussed in Part 1, it is strongly advised that you obtain legal advice from a commercial property lawyer. Andrew Pine is a solicitor who has acted for commercial tenants and landlords in the Gold Coast and Brisbane.

 

  1. Assignment and Sub-letting

Should you wish to sell your business, it is common term of the business sale contract that you assign the Lease of the Premises so that the Buyer can remain in the Property as Tenant.

It is also common that the Lease will require Landlord’s consent prior to assignment of the Lease occurring. At law, this consent cannot be reasonably withheld by the Landlord. A good starting point is for you to obtain information from the Assignee as to how experienced they are in the particular field your business operates in.

Another suggestion is that the Tenant procure financial information demonstrating they are financially capable of servicing the Lease, so will not be at risk of defaulting on rent / outgoings payments payable under the Lease after assignment occurs. You should obtain legal advice in regard to the specific documentation which must be provided when you choose to assign the Lease. However for now, it is best for your lawyer to review the Lease to ensure you have that assignment right without having to rely on the legal principle that consent cannot be unreasonably withheld.

Subletting is another factor you should consider. You may wish to sublet all or part of the Premises in future. Advice from your solicitor on your ability under the Lease to do this would be prudent.

 

  1. External Signage

External signage may make up a big component of your advertising. Commercial leases often require that any proposal for a Tenant to install signage must not be acted on until the Landlord consents to it. This is often a sticking point when multiple businesses operate from a large building. It is therefore recommended that this point be discussed prior to the Lease being entered into.

 

  1. Use of the Premises

The Lease will define what the Landlord permits the Tenant to use the Premises for. The Tenant cannot go outside the parameters of this use without Landlord consent. It is also for the Tenant to enquire with Council prior to execution of the Lease as to whether Council actually permits the Premises to be used for the Tenant’s intended purposes.

 

  1. Repairs and Maintenance

The Lease should provide whether the Tenant or Landlord are responsible for maintenance. It is commonplace for the Tenant to be responsible for cosmetic and general wear and tear maintenance. Conversely it is usually the Landlord’s responsibility to conduct any structural or watertight maintenance.

 

  1. Termination or rent abatement by the Tenant due to damage

The Lease should provide the Tenant with rights in the circumstance where the Premises is damaged (through no fault of its own) so as to make it unfit for the Tenant’s intended use. It is commonplace for the Tenant to have the right to a rent abatement (where the tenant is not obliged to pay rent) while the Tenant cannot occupy the Premises (usually while the Premises is being repaired). It is also frequent for tenants to have the right to terminate the Lease if repairs to the Premises are not commenced by the Landlord within a certain period of time.

It is recommended you contact a lawyer to discuss your rights and obligations regarding termination or rent abatement.

 

  1. Refurbishment at the end of the tenancy

Commercial leases often require the Tenant to not only put the Premises in the same condition it was in at the commencement of the Lease, but also to refurbish, such as give the walls a new lick of paint. This is however a commercial term to be negotiated between the parties.

 

  1. Landlord’s rights when the Tenant defaults

Leases often split defaults by the Tenant into two separate categories:

  1. Serious defaults such as a failure to pay rent / outgoings or using the Premises for a purpose other than the permitted use. Serious defaults entitle the Landlord to give notice to terminate the Lease, enter the Premises and re-let it. The Landlord is then able to claim any loss from the Tenant.
  2. Minor defaults entitle the Landlord to merely recover damages.

How defaults are categorised (or even whether the defaults have separate categories) will depend on the terms of your Lease. It is recommended your lawyer study these terms carefully.

 

  1. Car parking

Car Park allocations should be clearly noted on a map which is included in the Lease. Any additional rent for these allocations should also be included.

 

  1. Personal Guarantees

Tenants are often companies or trusts. As these are not natural persons, the directors of companies or the trustees of trusts are often required to give personal guarantees. These personal guarantees protect the Landlord by ensuring that if the Tenant company/trust defaults on its obligations under the Lease, the Landlord is able to pursue the director/trustee in their personal capacity to recover any damages.

Your lawyer can advise you on your rights and obligations in regard to personal guarantees.

 

  1. Bank Guarantee

The Lease often requires the Tenant to provide the Landlord with a Bank Guarantee for a certain amount of money, usually equivalent to a certain number of month’s rent (and outgoings if applicable). This Bank Guarantee is essentially a bond the Landlord can ‘cash in’ if the Tenant defaults on its obligations under the Lease.

 

As mentioned consistently throughout this blog, it is strongly advised that you engage a solicitor prior to entering into a commercial lease, nor assuming any obligations of a commercial tenancy.

About Andrew Pine

Andrew Pine is a commercial leasing and property development solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

Queensland Commercial Leasing – Part 1

Queensland commercial leasing is underpinned by numerous pieces of legislation. This legislation imposes strict rights and obligations on both the Landlord and Tenant.

It is always recommended that you obtain legal advice from a solicitor experienced in commercial leasing. Andrew Pine is a solicitor experienced in commercial leasing throughout South-East Queensland.

Another reason you should obtain legal advice is that your solicitor must be able to advise you while having regard to your individual circumstances.

It is therefore recommended that you (or an Agent) discuss negotiate the commercial terms of the proposed Lease, then forward these terms to a lawyer who can draft the necessary documentation and advise you on the implications of entering into this documentation.

When negotiating a commercial lease, you should consider:

  1. Property (Premises) Particulars

Determine the address of the Property (Premises). Is the Tenant renting only part of the Premises (such as one level of a multi-level building, or even part of one level?). In addition, if possible, obtain the Title particulars (the Lot and Plan number, along with the Title Reference). If this cannot be obtained, your solicitor will be able to assist and should review the title in any event.

 

  1. Term of the Lease and Options to Renew

Determine when the Lease will commence and when it will end. If you are a Landlord, ensure the Premises will be in an adequate condition at the proposed commencement date. The Premises may also be covered by the Retail Shop Leases Act 1994 (Qld) which imposes obligations on you to disclose certain information, with a required time period after such disclosure before the Tenant can sign the Lease, let alone have the Lease commence. You should therefore discuss with your lawyer whether the Retail Shop Leases Act 1994 (Qld) applies to your Premises.

Given businesses often build up good-will as a result of trading from a particular Premises, Tenants often want the right (but not the obligation) to require the Landlord to renew the Lease at the end of the first term. This is called an Option to renew. Options must be outlined in the Lease and specify the length of team of each respective option. For example: the Lease may be for an initial term of 3 years, with the Tenant having two Options to renew of 3 years each. In such a circumstance, the Tenant could operate from the Premises for 9 years without the Landlord having a right to terminate the Lease.

Leases usually require Options to be exercised by the Tenant a few months before the expiry of the existing term. It is therefore recommended that you discuss the terms of your Option with your lawyer.

 

  1. Rent and Rent Reviews

Initial rent should be stated clearly in the Lease, as well as the dates that rent reviews will take place. The parties may also negotiate whether rent reviews will be a fixed percent, CPI, reviewed to market rent, or a mixture of the three. It is common for rent to be reviewed as a fixed percentage or CPI throughout a term of the Lease. However on the date one term expires and another starts (if the Tenant exercises its Option to renew), rent is often renewed to market rate.

 

  1. Outgoings and utilities

It is commonplace for Tenants to pay some, or all, of the outgoings for a Premises. Tenants often pay or contribute towards rates, water connection, body corporate levies, land tax various insurance premiums and glass breakage. Payment by the tenant of outgoings is of course a commercial negotiation and can vary on a case-by-case basis. If the Premises is part of a wider building, it is also common for tenants to pay a percentage of the wider building’s outgoings based on the square meterage of the Premises as a percentage of the square meterage of the overall building.

It is also commonplace for Tenants to pay for their own utilities, such as power, water usage, gas, public liability insurance and property insurance. Leases specify the various insurance policies the Tenant must take out, as well as the specific requirements each respective policy must have. It is recommended that your solicitor reviews these terms as they will be best placed to determine whether an insurer will be willing to provide you with a policy which is compliant with your Lease.

 

  1. GST

Ensure that the Lease clearly notes whether GST is payable in addition to rent. It is commonplace for GST to be payable in addition to rent. This is because most commercial landlords will be registered for GST. It is therefore advisable that you contact your accountant to discuss whether you should be registered for GST. You may be able to claim the GST you pay as a deduction, but this is a consideration for your accountant.

 

Further points to consider will be outlined in the next edition of this blog.

As noted throughout this article, it is strongly recommended that you consult a lawyer prior to executing any commercial lease documentation.

 

Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.

 

How to buy your first home in Queensland – Part 1 – Get a deposit

For most of us, a house will be the most valuable thing we own during our lifetime. The right house is also your first rung on the property ladder, should you want to climb your way to financial freedom. The wrong house could leave you financially and emotionally stressed, wishing you had never embarked on this adventure in the first place.

But we haven’t even started yet! A lot of jargon is thrown around by those in the property industry. For a first home buyer, hearing Agents and Banks using phrases like “leaky buildings”, “stamp duty”, “Lender’s Mortgage Insurance”, “Loan to Value Ratios” and “First Home Owners Grant” is enough to make you sit back and wonder whether you will ever know enough about this industry to dip your toe in without accidentally choosing that ‘wrong’ house.

So how are people in Queensland buying their first home and what do you actually need to know? Over the next few weeks we will outline a road map which covers the basics. Today, let’s focus on what your goal is and the first step – getting that deposit!

  1. Determine your Objective

This is the most important (and most boring) part of the exercise. But without knowing what your destination is (the objective), how can you know how to get there?

An objective must be a defined thing. You must be able to determine whether you have arrived at your destination. “Being really rich” is not sufficiently defined, while having five positively geared rental properties is. So is owning that dream family home with no mortgage.

For now, let’s assume your objective is to purchase your first home at an affordable price which does not ruin your existing lifestyle.

The remainder of this series therefore maps out how you can get to your destination. But first lets work out how to get started: how to get that deposit!

  1. Deposit

Unless your parents are extremely rich or you made some very, very smart saving decisions when you were a child, you are most probably going to have to borrow money to buy your first house. Let’s assume you need to borrow from a bank.

Regardless of whether your objective is to own a hundred rental properties, or one mansion for yourself to live in, you must contribute to part of the total cost of buying that first property.

Historically banks required you to save 20% of the price. But given the median house price is Brisbane is now $580,000.00, it might take you a while to save over $115,000.00.

Banks have therefore relaxed their 20% requirement. It is now possible for your deposit to be as little as 5% of the price. Some banks will even not require you to have saved the entire 5% yourself, provided you meet certain criteria. However, once you have less than a 20% deposit, banks decide that you are risky to lend money to. Banks therefore charge you Lender’s Mortgage Insurance (LMI), which is a fee quite often charged when you first borrow the loan. All of a sudden that $50,000.00 deposit you saved up over a year or two is down a few thousand dollars and we haven’t even delved into the realm of transfer duty (“stamp duty”) yet!

So how can you avoid LMI? Well three ways, or, hopefully a combination of all. Firstly, when calculating your deposit, banks will take into account the First Home Owners’ Grant (up to $20,000.00 until 30 June 2017). Are you eligible? To find out, here is a link to the relevant website.

Secondly, a relative can also guarantee part of your loan without even giving you any money! Emphasis on “part”. A guarantee is where a relative (often a parent) promises the bank that if you cannot make your loan repayments, they will pay instead. The bank usually requires this relative to use their property as security. This can be an awkward conversation to have: “hey mum, if I borrow money from the bank and can’t pay, are you ok with the bank selling your house?”. However, the best way to frame this request is to make it clear that the relative is only guaranteeing whatever part of the 20% you have not yet obtained. Once your loan is less than 80% of your home’s value (i.e. you own 20% of the property), your relative is released from their guarantee. If you have chosen the “right” property (more on that later), the value of the property might increase so that even if you do not pay the loan off quickly, you might reach that 20% mark within a couple of years.

Thirdly is – putting it simply, you need save some money yourself. However a few banks won’t even require you to have saved 5% of the price. Provided you have 5% made up of a combination of savings, First Home Owners’ Grant and/or a relative guarantee, some banks will take into account the fact that you have been paying rent while saving for your deposit, so will not require you to have saved 5% yourself. This is an exceptional circumstance and banks must comply with strict lending requirements to ensure they are lending to you in a responsible way. Given I am not a qualified financial advisor, if you wish to go down this route, I suggest teaming up with an experienced broker and financial planner.

Remember that unless you have a total of 20% made up of these three factors, you will be paying thousands of dollars of Lender’s Mortgage Insurance which really eats in to the money you have saved. It’s wasted money.

With house prices increasing faster than our incomes, Buyers need to be creative when obtaining a deposit. However as soon as you are on the property ladder with that “right” property, its value should increase and you are then well on your way to financial freedom, that dream home, or both!

Next week – Minimising entry costs

 

Disclaimer: Andrew Pine is a property solicitor practising in Queensland. Andrew is not qualified to give accounting or financial advice. This article is written solely as an opinion of the writer. This article should not be relied upon for legal, accounting or financial advice. You should always seek advice which is tailored to your individual circumstances.