Law & Business

Business Considerations


Question: I have a commercial property I am going to lease to a new tenant. The tenant is a company. What type of security can I obtain from the company to ensure the rent is paid?

Answer:

There are generally 2 types of security that can be obtained from a company to ensure the rent and other financial obligations of the tenant under a commercial lease are met.


The most common type of security is personal guarantees provided by the directors of the company. When a director of a company provides a personal guarantee that director is personally liable for the performance of the lease by the company, including for payment of any money owing to you. You may be able to take legal action against the individuals who have provided the guarantees to obtain any money owed.


A second type of security commonly obtained is a security bond or bank guarantee. The landlord should insist that the security bond or bank guarantee be provided by the company on commencement of the lease.


A security bond is a sum of money paid by the tenant company to the landlord. If the lease is a retail lease, or if agreed by you and the tenant, it would be invested in an interest earning account during the term of the lease, with the interest usually paid to the tenant.


A bank guarantee is a guarantee provided by a financial institution on behalf of the tenant for a specified amount of money. The tenant will need to obtain finance approval from their financial institution to obtain such a guarantee.


The amount of the security bond/bank guarantee will be agreed between the parties during negotiations and is generally a few months rent plus GST.


If the tenant is unable to pay for any monies owing under the lease the landlord will be able to use money from the security bond as payment. The tenant company should re-instate to the landlord the appropriate amount of money to ensure the full amount of the security bond is held by the landlord at all times. If a bank guarantee has been provided any money owed by the tenant is able to be obtained from the financial institution who provided the bank guarantee.


It is common practice for a landlord to request personal guarantees from the directors of the company as well as a security bond or bank guarantee.


If you are a landlord you should see your solicitor before entering into a lease to ensure that the appropriate securities are obtained to ensure the tenant complies with the payment of rent and any other financial obligations as required by the lease


Question:

I own a retail store and one of my suppliers has threatened to stop supplying their products to me if I do not order certain products from another company. I want to continue to sell my suppliers product but I have no interest in selling the related company’s products. What should I do?


Answer:

You should not allow a supplier to threaten you or to put pressure on you to purchase products from a third party.


The action of the supplier in attempting to do this is a type of exclusive dealing known as “third line forcing” and is usually prohibited by the Trade Practices Act.



Third line forcing is a form of exclusive dealing which involves the supply of goods and services on condition that the purchaser buys other specified goods or services from a third party. This is usually prohibited because it can reduce competition in the marketplace.


A supplier can recommend or promote another company’s products but usually they cannot impose a condition in their sales contract that you must purchase the product of another company.


It is not necessary for you to prove that the suppliers attempt at exclusive dealing has had an anti-competitive effect. If the attempt by the supplier to force you to purchase another party’s products is illegal, it is not necessary to prove that it has lessened competition.


Conduct may not amount to third line forcing if the supplier and the third party are selling their products as a package so that there is one single packaged product rather than two separate products.


You should let the supplier know that their actions in trying to force you to purchase the third party’s products may be illegal. You should also speak with a solicitor to determine your legal position and how to prevent the supplier from doing this, and for advice on the best way to continue to purchase the supplier’s products.


For more information you can also contact the Australian Competition & Consumer Commission, which is the Federal government department which deals with the Trade Practices Act.


Question:

I own a business that operates out of leased premises. If I decide to sell my business, how do I ensure that the lease is transferred to the purchaser?


Answer:

When you sell the business the transfer (or “assignment”) of the lease will be dealt with in your sale of business contract. The sale of the business will usually be conditional on the lease being assigned.


Also, the lease itself will say what you have to do to get the consent of the landlord to the assignment. The landlord will usually want to review the financial details of the purchaser to ensure that he or she will be able to pay the rent under the lease. The purchaser will have to provide to the landlord a statement of the purchaser’s assets and liabilities and business experience to assist the landlord in making the decision.


The landlord usually must not unreasonably refuse to give consent to the assignment. With a retail lease, the landlord will only be able to refuse to consent to the assignment if the purchaser intends to change the use to which the building is used, or if the purchaser has financial resources or business skills that are inferior to yours, or if you have not complied with any terms or conditions under the lease.


Unless certain provisions of the Retail Leases Act are complied with, you will remain liable to the landlord for various conditions of the lease for the full term of the lease. The purchaser must however agree to pay the rent and comply with the lease. A legal document will be entered between the landlord, you as the outgoing tenant and the purchaser as the new tenant, to ensure that the new tenant is legally bound. You will usually be required to pay for the landlord’s reasonable legal costs for having the deed prepared and the assignment completed.


You should speak to your lawyer to have explained to you the relevant parts of the sale contract, the lease and where applicable the Retail Leases Act. There are also many other legal issues to be dealt with on a sale of a business, including whether or not GST must be paid, employees rights, and whether you must agree not to set up in competition with the purchaser for a certain time.

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