What are you lease obligations?
When you are in the trenches and focused on running your motel it is easy to forget to take a step back and check your lease obligations. How long do you have left on your lease? When should your options be exercised? Are there redecoration works that need to be attended to? Do you need to provide copies of insurances or other reports to your landlord? Have times changed so much that it might be worth revisiting some of the lease clauses (for example the AAA star rating)?
If you haven’t read your lease lately then we strongly suggest that you do. If there is anything at all that you don’t understand then please ask us. A small investment of time now could save many hours – and potentially a lot of money – in the future.
Term and options
The term of the lease is important to both the value of a tenant’s business and the value of the freehold owner’s investment. A lease which has 5 years left to run is obviously of far less value than one with 20 years left. Often a motel lease will start for a term of 25 years in total (when you add in the term plus any options). Typically this will be an initial term of 5 or 10 years plus a number of 5 year options.
Generally in a commercial leases you will find that, to exercise an option, the tenant must give notice to the landlord within a certain period of time. If the option period is not exercised within the time frame and in the manner specified in the lease then the tenant will lose the right to exercise the option. Often motel leases are drafted differently (to help prevent tenants from forgetting to exercise their option), so that the option exercises automatically. However, it is important to understand that this is not the case for every motel lease. You should check yours now and if you do have a lease which requires notice to exercise the option then it is very important that you diarise the dates and exercise the option strictly in accordance with the terms of the lease. When an option is exercised, it is important that the extended term is registered on the title.
As options are exercised the remaining term of the lease decreases and it is worthwhile considering the best time to negotiate adding more time to the end of the lease. Often this is done by “buying” further years from the landlord.
Maintaining your property to a star rating
An issue that we see frequently in older leases is the requirement to maintain the property to a certain star rating. Most leases still refer to an old AAA star rating, and define that term as including any successors of the AAA.
The AAA star rating system was established back in the 1950’s when the Australian Auto Clubs began assessing accommodation on behalf of its members. This grew over time to be a symbol of quality, and in relation to motels was used to help determine the repair and maintenance obligations of the tenant. Generally speaking, if the tenant was maintaining the star rating to the level required, that was all they needed to do.
A few years ago the original AAA star rating system ended and became Star Ratings Australia. The system was changed significantly and now the Star Rating is determined by more than 200 criteria and reflects the cleanliness, quality and condition of guest facilities. You need to be a member of Star Ratings Australia to be part of the program, and to even use the ‘star’ symbols (which is a licensed trademark owned by the Australian Tourism Industry Council (ATIC)).
When you first join Star Ratings Australia you will need to ensure that the property is eligible to be star rated and meets the criteria. There will be an initial inspection and then a site visit every 3 years thereafter.
Why is this relevant? Because Star Ratings Australia is generally accepted to be the successor of AAA and if you read your lease, you may find that you have an obligation to:
- maintain a certain star rating;
- arrange an inspection every 12 months;
- comply with the AAA inspection report; and
- provide a copy of that report to the landlord.
It may simply not be possible to comply with these lease obligations due to the change in the system, or it may be that the star rating system is not as relevant as it used to be for your motel (with the rise of online reviews, some guests will look to Tripadvsor before checking the star rating). Whilst many landlords are understanding of the changes, any incoming purchaser (and their financier) will want to see the lease amended and updated to ensure that they are not walking into a situation where they could technically be in breach of the lease from day one.
Often, motel leases will provide that where the star rating ceases to exist and there is no alternative rating classification scheme, then the tenant must:
- at reasonable times, redecorate the motel;
- paint, repaint, recover, clean etc the interior and exterior of the building; and
- maintain the gardens and landscaping (which could include restoring and replacing).
Arguably, if you have not been participating in the star ratings system, then you should have been ensuring that redecorations works are being attended to. Often these types of works are done by tenants on an ad hoc basis or a rolling schedule, rather than in one big job. It is worthwhile checking to ensure that if you have any such “redecoration” obligations, that you know what needs to be done and by when.
Find your lease, read it and understand what you should be doing and when. If you have any questions or need clarification, do not hesitate to ask us for assistance. We are more than happy to help and it never hurts to be prepared.
After your own review of the lease, you may find that it is an opportune time to check in with your landlord and have a discussion about some possible updates. This can only be done with the agreement of both parties, however in our experience, it is much easier to reach an amicable agreement when the goal is to update the lease so that it serves the interests of both parties. This is certainly easier to do in times of peace than in the heat of a battle arguing about who needs to do what, or with the pressure of a sale.
As each lease and business situation will be different, please take out comments as general guidance and contact Mahoneys to obtain timely and practical legal advice on the actual issues you are facing.