Capital works confusion costing tenants and landlords

Capital works confusion costing tenants and landlords
Oliver WisniewskiNovember 17, 2014

Confusion with capital works is costing tenants and landlords thousands of dollars on legal fees that can easily be avoided, according to Opteon Property Group.

Confusion often comes after a rent review, especially if a tenant has made changes to the property, such as installing a lift or painting the outside of the building. When a rent review is conducted these new capital works are taken into account and rent can therefore rise.

“Even though landlords are obligated to undertake capital works on a tenant’s behalf, tenants often decide to undertake capital work themselves, and it is this scenario that disputations can arise,” says David Tunbridge, head of Opteon Victoria Hospitality Department. 

According to the Retail Leases Act (2003) the landlord is responsible to undertake any capital works, which are classified as structural works that will end up becoming the property of the landlord after the lease expires, should they be required. However, a tenant’s responsibility to add features to the property only covers things such as installing air conditioners and sometimes kitchen and bathroom amenities.

Tunbridge recently made a property valuation where the landlord leased a former church building with the intention of converting it into a restaurant.

“The prospective tenant has committed to a lease and will be undertaking a significant internal fit out, as well as making substantial capital works to the premises,” he said.

“The lease provides for an initial one-year term together with three further terms of five years with a market rent review to apply at the commencement of each further option term.

“In this instance we can see that clearly the tenant is exposed, as the capital works will need to be assessed in determining the market rent should the tenant exercise its option to renew the lease.

“If the tenant’s business fails, and the tenant vacates after the initial one year term, then the landlord stands to make significant gains by receiving an improved and upgraded building.

“Alternatively if the tenant renews the lease for a further 5 years, then the market rent will be increased to reflect the works undertaken by the tenant as there is nothing written in the lease to the contrary.

“This is an unfortunate situation whereby only one side can benefit and is clearly unfair to the tenant.”

However, Tunbridge believes there is a simple solution to this problem. If capital works are going to be undertaken by a tenant, he believes that a written agreement between tenant and landlord would give both parties an understanding of what capital works will do to the rent value come rent review time.

“If both parties meet, talk and agree on how best to share the cost of capital works before they are undertaken, it can be a win-win for both sides,” he said.

Editor's Picks

Madeline, Moorabbin apartments approach completion
Safari Group offers low-touch investment proposition in Queenstown’s popular ski fields district
Citimax to continue to elevate Sunshine Coast living with Ascend Kings Beach
Walker Corp get sign off for SOL by Walker in Maroochydore
First look: Surfers Paradise riverfront set for more new apartments