First time property investor? Beware; ensure the premises are safe!

Buying a residential property is a popular investment strategy for many Australians.  In my experience it continues to be a first time venture for the many buyers I meet.

Properties range from old to brand new, from “studio” or “bachelor” units to multi-bedroom houses.  No matter.  If you’ve bought, or are just about to buy, your first residential investment property, even if you’re a landlord already, take care!

Your managing agent and your accountant can advise you on the business side of things, but as a landlord, the law imposes duties on landlords that they must still take reasonable care concerning the dangers that might exist on premises they rent out, even hidden ones that aren’t readily apparent on inspection.

For example, is there safety glass installed where it’s required  that meets current standards?  Is there any defective electrical wiring?

Real court cases emphasise the need for landlords to carry out detailed inspections before properties are rented out – it’s usually not enough to just leave it to the agent.

It’s also not enough to claim that a tenant accepted the property “as is”, or that you just bought the property and “didn’t know” of a defect. 

The High Court stated the landlord is in the best position to control the state in which premises are let and therefore owed a duty to tenants to eliminate defects in the premises before tenants move in.  So, inspections are necessary before the new tenants move in.  Ensure full records are kept showing that obligations have been met regarding these inspections.

Here’s a curly one.  You just bought an investment property and your first tenant is the seller of that property, certainly not an unusual occurrence.  Who’s responsible if a short while later your new tenant has an accident falling through the glass front door suffering severe injuries because the door was fitted with the wrong glass?  You don’t want find out then that perhaps your insurance policy doesn’t cover you!

This case emphasises the necessity of landlords carrying out detailed inspections before premises are let.

With judgments of in the order of $1.2m and over $840,000 in these types of cases, don’t chance it!  They highlight the necessity of landlords to carry out proper inspections before properties are rented out.   If in doubt, have a chat with your lawyer.

Business franchising can be good, but is it all good?

As a method of getting a foothold into starting, owning and running a business, business format franchising is a well regarded and popular method.  Indeed, on a per capita basis, Australia is said to be the “franchise capital of the world”, even more so than the USA.

There are plenty of good-news stories and guides about the advantages of business format franchising.  A timely article in today’s Sydney Morning Herald, however, highlights what many consider an often neglected downside, for franchisees, in many franchising systems.  Even after allowing for any rights to renew for additional terms, most franchise agreements have a final end date, be it 5, 10 years or even 20 years from the start date, for example.

 

Once the franchise term is at an end, typically there is no right for the franchisee to obtain a new agreement from the franchisor.  Or as the article puts it, if you’re at the end of your franchising contract, the franchisor can do whatever it wants.

Unlike typical non-franchise businesses, towards the end of the franchise contract, the franchisee can find themselves with no rights, no asset... you have nothing at all; there’s no goodwill, there’s nothing.  You pick up your kit bag and go home. 

Metaphorically, and possibly quite literally, once you lock the doors for the last time, the keys are just simply handed back to the franchisor.  No reward, no payment and no return for the goodwill that was probably built up over years of hard work.

On the other hand, if one has an independant, non-connected and successful small business enterprise, the owner usually has a valuable asset to sell; the years’ worth of built up goodwill adding value and hopefully providing a decent return when the business is sold.

It’s not all bad.  If you’re thinking about starting or buying a franchise business, it's vitally important you just need to be aware of these sort of issues.  As always, make an informed decision after obtaining professional advice, particularly from your accountant and your solicitor.

Buying and “cooling off” – know this

Well first, why have this? It mostly results from attempts to reduce the practice of gazumping in real estate transactions.  More on this practice in a previous post. 

If you’re a buyer, there is information here that may be useful to you but always seek the advice of your own solicitor or conveyancer when looking at your own particular circumstances.

The law requires sellers of residential property to have a copy of the proposed contract available for inspection by any purchaser (link to relevant NSW law here).  The proposed contract here means the full proposed contract will all relevant documents, not a “draft” that’s still waiting for compulsory attachments yet to arrive.

Take a situation where, typically through a real estate agent, a buyer has negotiated a purchase of a house, the seller agrees to price and perhaps other terms.  The buyer hasn’t yet consulted their solicitor, they’ve heard something about pest and building inspections, and the bank loan still has to be organised.

Say you’re the buyer and you’re keen on the house – dare I say, you love it!   Understandably you’re also worried about signing a contract with these other things still to attend to.  Importantly, you’re also worried about losing the chance, especially because you’ve worked out that the sales agent, and other in his/her office are keen to sell to anyone else, even though you’ve done a deal while you’re off doing the other important things.

Where a buyer signs the contract with a real estate agent and the agent does the exchange of contracts, by law the buyer has a minimum 5 clear business days cooling off period – so weekends and public holidays are excluded.  If contracts are exchanged on a Tuesday afternoon, the cooling off period expires at 5.00pm on the following Tuesday; if the agent exchanged on a Sunday, the cooling off period expires at 5.00pm on the following Friday.

Now the buyer is meant to do what they have to do, for example consult their solicitor, arrange pest and building inspections, and ensure they obtain their unconditional loan approval for the funds they’ve applied to borrow.

The buyer is entitled to pull out of, or rescind, the contract for any reason whatsoever anytime during the cooling off period.  There is a relatively small cost; if the buyer exercises their right to withdraw from the contract, they forfeit 0.25% of the agreed sale price – typically this amount has already been paid to the agent at the time of signing.  The seller however, can’t rescind for any reason, even if they receive a better offer – see the same earlier post.

These days, many lenders are taking somewhat longer to approve loans.  If the 5 day cooling off period is too short and the buyer needs more time, before the cooling off period ends, the buyer can request and extension to the cooling off period.  To ensure problems are minimised, this is probably best done by the buyer well before the expiry time, and through your solicitor.

The cooling off gives buyers some peace of mind and a period of time to attend to and finalise matters relating to contract, secure in the knowledge sellers can’t change their mind or accept other offers, and goes some way in minimising gazumping.

Beware too.  Once the cooling off period comes and goes, unless the buyer has rescinded before the expiry time, the contract becomes binding and unconditional.

Are there any disadvantages?  Yes, there are some.  The first one is the cost of rescinding.  There are legal, inspections and other like fees the buyer incurs.  In addition, the buyer forfeits the 0.25% of the price to the seller.  On a $600,000 price, that’s $1,500 – it’s form of compensation to the seller.

Another disadvantage is that while terms of the contract can still be negotiated during the cooling off period between the parties’ solicitors, the bargaining advantage remains with the seller.  They know they have a keen buyer – the buyer has already committed a part deposit and incurred expenses. 

With this knowledge, sellers are generally less inclined to negotiate away terms compared to if the negotiations were taking place before contracts are exchanged and the seller wants to encourage a buyer to commit.  In my experience, I have found that there are now many more contracts drafted for sellers with numerous additional generic clauses to cover many contingencies in favour of the seller, sometimes even taking away or changing already very reasonable clauses in the “standard” contract.