Options and market reviews: an old article

Options and market reviews – AUSTRALIAN LEASE & PROPERTY CONSULTANTS Pty Ltd; 3D Economics Pty Ltd © Copyright Donald Evan Gilbert Sept 2009 © By Don E Gilbert

Donald E Gilbert – Australian Lease & Property Consultants Pty Ltd

B Com/B Econ; Dip Prop Val; Cert Med & Arbit.
CPV; MRICS (RICS accredited valuer expert and arbitrator)
Specialist Retail Valuer & Arbitrator
We value leases across Australia
Firm Regulated by RICS
Don Gilbert is a specialist retail valuer and arbitrator. He provides independent impartial advice to landlords, prospective investors and tenants. He is not an advocate for landlord or tenant interests. He is interested in fair legislation and outcomes for the benefit of the whole industry – see www.aaapc.net.au

Background

I have had many calls about options and market reviews this year. The first was on the 27th December during my annual leave; I relented under ‘duress’ and went back to work earlier on the 5th January.

The matter involved a South Australian landlord, who believed a senior valuer had been influenced by a valuation report prepared for the tenant. My instructions were to critique the determination and provide an opinion.

Market reviews and options

Lease flexibility, security of tenure, and rents which are current market rent significantly add value to the “intangible asset value” of a tenant and landlord’s “business” or bundle of leases.

The Global Financial Crisis (‘GFC’) was built on “Mortgage Backed Securities”, valued by the “Ratings Agencies” which had no value.

Similarly, short-term leases, with no options or market reviews, and rent above “current market rent” must significantly mark down the value of a tenant’s and landlord’s assets.

I cannot understate the significant importance of these words. For all stakeholders including investors, legislators, regulators and their advisors.

If one does not want to “add value” to a lease or bundle of leases, offer no tenure, options, lease and rent flexibility and charge top dollar. Equally the opposite applies. Full stop.

We will examine this in subsequent articles.

The process; getting it right

At an industry gala awards function last weekend I was hounded about options/market reviews. In the last week, I had to provide advice to a tenant, whose three year lease is one of the first to fall under the provisions of the amended Queensland legislation, where the landlord must notify the tenant, about exercising their option (three year lease from April 2006).

This lease required the tenant to notify the landlord, which the tenant’s solicitor did. Legislation always takes precedent over lease terms. The reason the tenant “exercised” their option early in good faith was to establish; the market rent before committing. But they did not realise (or were advised) about this important change in the legislation, or that normally they would be committed to the lease and rent determined.

But a tenant now has the right under S 27A to seek “early determination” of the current market rent before committing to the lease option and the rent:

For leases of one year or less, by giving notice 1 – 3 months before the option expiry date;
For leases of more than one year, 3 – 6 months before.

So both the landlord and the tenant failed: the landlord to advise about the option two to six months before the end of lease under S 46 and the tenant to seek early agreement/determination of the rent. The tenant has since written to “wind-back” their position relying on the Act about the current market rent, and the landlord’s notice about the option under legal advice.

Once the rent has been determined by an independent expert determiner (assuming failure by the parties to reach agreement), the tenant can “opt in” or “opt out” to exercise the option.

The expert determiners criteria on making his determination will scrutinise those critical factors one considers under S 29 of the legislation very carefully in making his or her determination.

Vacant properties with no tenants (paying rent), significantly devalue buildings as some Gold Coast landlords are finding out.

Please note: for most options, tenants must give written notice to their landlords within a specified time frame. One’s lease will spell out what to do. Do not miss critical dates or inadvertently change lease terms i.e. requesting another lease term, etc. Seek legal advice, Know the financial consequences of exercising one’s option.

Conclusion

The industry, legislators and regulators continue to “gamble” with leases, the intangible asset value of tenant’s businesses and the landlord’s bundle of leases that makes up the “value” of an underlying asset i.e. the true value of the shopping centre by subscribing to “rent control” via misleading and deceptive industry conduct.

While New South Wales and Victorian legislators have taken the undue influence placed on valuers seriously and provide “immunity” to expert determiners, in Queensland we are expected to do the work and cop harassment and victimisation after a determination is made. I have gone on the front foot several times with law firms.

And demanded an apology; and got it. Otherwise their conduct would have been unconscionable. Their actions were not based on substance and fact, just an attempt to overturn a determination for one party.

Ironically, lawyers and barristers rely on our expert reports, to give them “numbers” to run their cases. Because that is what we do and understand extremely well.

Valuers value the world’s assets, but do not know how to place a value on their own services or their significant worth to the Global Financial system!

In New South Wales, Victoria and Queensland specialist retail valuers are seeking to hone their skills, in this difficult and exciting area (and enormously responsible one).

The detailed critique that cut short my Christmas holidays drew favourable comment from the leading barrister in the valuation field in Australia. That is a reasonable reason to cut short one’s holiday.

I believe that Business Brokers who are the in the line of fire and action with regard to business and sales transactions, have a valuable role to play in lobbying politicians to fix tenancy law.

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