Lease Backs, Are They Worth It?

Contributed By: Short Punch & Greatorix on

Management Rights usually operate on the basis that the Manager acts strictly as a Letting Agent for the unit owners who wish to let out their units on a permanent or holiday let basis.

However, in some cases Managers have been entering into what is commonly known in the industry as “lease back” agreements with some unit owners.  This involves the Manager agreeing to pay the unit owner a guaranteed rent on the basis that the Manager is entitled to keep all income received from renting out the unit.

Lease back arrangements may be considered by some Managers and unit owners to be more commercially acceptable than the usual letting agency arrangements.  However, Managers need to consider the legal ramifications of being involved in lease back arrangements and in particular the following points:-

  • Lease back arrangements for holiday units are probably not covered by the ASIC class orders which exempt managers from having to comply with the managed investment provisions of the Corporations Law. Compliance with these provisions can be a complicated and expensive process.
  • Proper documentation of the lease back arrangements needs to be handled by a lawyer. Sometimes it is difficult for lawyers to establish what statutory law applies.  For example there is some doubt as to whether or not the Residential Tenancies Act will apply.  This can make it difficult to determine exactly how lease back arrangements should be documented to comply with the law.
  • Under the Property Occupations Regulations, lease back arrangements probably constitute a conflict of interest. This would mean that the Manager would be required to disclose all lease back arrangements to owners of units for whom the Agent acts as letting agent before accepting from, or continuing to act under a letting agency appointment from any of those unit owners.  In my experience Managers face the problem of letting unit owners assuming that the Manager will let out lease back units in preference to letting out units for which the Manager is only the letting agent.
  • The process of selling Management Rights is more complicated where lease back arrangements are involved. The standard REIQ form of sales contract for Management Rights does not cater for lease back arrangements, and therefore special conditions need to be added to the sales contract. Special conditions currently being inserted to attempt to cover Lease backs, may be too general to adequately cover their transfer to a buyer.  In any case, additional documents are required to transfer lease back agreements to a buyer, and it may not be possible to transfer them without the consent of each lease back unit owner.
  • Even a sale of Management Rights, and the transfer of lease back contracts to the incoming Manager, may not legally relieve the outgoing Manager from obligations to the unit owners under the contracts.
  • Lettings by a Manager as an agent for a unit owner are not subject to GST. Managers who let out units which are subject to lease back agreements probably have to pay GST on the income they receive from letting out the units.

Before entering into lease back arrangements, Managers need to carefully consider the legal complication of lease back agreements as well as the commercial risks and benefits.

 

1 Comment

  1. I have a lease back with Mantra – It’s a really good arrangement for holiday units because my rent is stable and I don’t have to worry about seasonal variations. Mantra also throw in a couple of weeks free accommodation for me off peak season (when they know the unit will be available anyway) and they obviously pay us less rent than we’d get on a commission basis but I don’t mind paying for the stability. It’s a win-win for us with them and I’d definitely consider the arrangement with other holiday properties.

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