A leaseback or some other form of guaranteed owner income – typically a standard letting appointment but with a guaranteed minimum return to the owner – are often used by managers as a way of attracting to the short term letting pool owners who are concerned about inconsistent or potentially lower returns. These also have the potential to generate significantly greater income for the manager.
For those readers unfamiliar with the term “leaseback”, it is the name given to the leases or tenancy agreements between an owner as landlord and the manager or a company related to the manager as tenant under which the tenant can sublet the apartment for short term letting.
As it is a lease, the owner receives an agreed rent as set out in the lease irrespective of the return achieved from the short term subletting of the apartment by the manager or related tenant.
There are two basic types of guaranteed return letting appointments. The first is where the manager simply guarantees the owner a minimum net return and the owner benefits from anything above that. The second type is where the manager retains anything received above the guaranteed net return to the owner – usually described as a performance bonus.
I am often asked which one is best – a leaseback or a guaranteed return letting appointment? The answer will depend on the circumstances. Below is an updated table I put together some time ago. Readers can consider these in trying to work out what is best for them. Note that table relates to Queensland law and there will be come differences for the other states.
| Leaseback | Letting appointment with a guaranteed return | |
| No prescribed form (unless it is intended to register the lease) – note that a leaseback is not a residential tenancy agreement and the RTA Form 18A should not be used. Mahoneys have developed an appropriate form of lease for our clients. | Prescribed form but with special conditions | |
| Generally not assignable to a new manager without landlord consent (but that can be covered in the conditions) | Assignable to a new manager | |
| The existence of even one leaseback requires disclosure to other owners in the letting pool due to conflict of interest | Similar disclosure requirement | |
| Where the manager is the tenant there is the potential that GST is payable on the tariff as the accommodation for the guest is being supplied by the manager in the manager’s own right not as agent for an owner | No GST on the tariff – treated like any other letting appointment | |
| Where the manager is the tenant, the tariff paid by guests must not be paid to the manager’s trust account but must be paid to the manager’s general account | Tariffs go to the manager’s trust account like any other letting appointment | |
| To avoid the 2 problems above, it is important that the tenant not be the manager but that the tenant appoint the manager to act as the tenant’s agent to sublet the apartment | ||
| Excess rent from subletting received by manager is not subject to GST | Most accountants regard the excess received by the manager is subject to GST | |
| Can be for a fixed term (but in most cases the MIA provisions of the Corporations Act applies and can be terminated on 90 days notice) | Can be terminated on no more than 30 days notice | |
| Potentially locked into ongoing liability despite market downturn (e.g. Covid) | 30 days termination allows manager to avoid ongoing liability | |
| Rent received by the tenant above the payment to the owner is not subject to GST | Rent received by the manager above the payment to the owner (typically the performance bonus) is subject to GST | |
| Seen by some valuers as a liability potentially results in a lower multiplier | More widely accepted by valuers and likely to be valued at a higher multiplier |
As mentioned above, which one is best will depend on a manager’s own circumstances. However if a leaseback is the preferred option, have regard to the comments above. In particular do not use an RTA Form 18A, do not have the manager as the tenant and make sure you make disclosure to your other owners in your letting pool.
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