Written by Stephen Hains

In the article “Tenants that Don’t Pay”, Phillip outlined steps and approaches to manage tenants that pay late.

The steps to encourage tenants to remedy their rental arrears includes a legal letter of demand and contains a warning that they have 14 days to remedy their arrears or you will lock the doors. In the very rare cases when a tenant defaults on their lease it is important to know what the landlord can do to minimise your exposure.

Recently one of my café owners indicated they were experiencing financial hardship and wanted to move from monthly billing to weekly. The tenant had another shop that he also operated nearby that was doing well, and that shop was propping up the struggling cafe. Based on the overall cashflow from both café’s I agreed to the weekly invoicing for a short period – until the tenant’s shop improved its turnover.

Weeks turned into months and although the tenant seemed to be doing everything right their fortunes did not change and they slipped into rental default. The tenant started missing rental payments and ignored my requests to source a personal loan from the bank, after the tenant reached 4 weeks in arrears I had no choice but to issue a letter of demand giving them 14 days notice to remedy their arrears or be locked out. The tenant could not remedy their arrears and provided me notice that they would be closing the business.

The tenant had pulled the pin 18 months into a 5 year lease, not only was I out of pocket 6 weeks rent, I now faced the challenge of finding a new tenant. I would need to meet the cost of advertising, paying agent commission fees and the typical request from an incoming tenant for a rent free fit-out period, or a fit-out contribution.

The exposure is magnified by a period of no rent while the shop was vacant. But wait, don’t forget the tenant’s bond is available to mitigate the loss. When I purchased this shop, I inherited the tenant, I knew he was a highly regarded chef that was running two cafes in neighbouring suburbs. Having two shops and the lease in a company name (Pty Ltd) is usually a warning sign, but the lease had a significant 4½ month bond, held in the form of a bank guarantee. Having the lease in a company name means if they default the landlord has no access to the tenant’s personal assets, i.e. their home.   The original landlord protected themselves against this risk by requesting a large bond, hence this security transferred to me as the new owner.

When the shop’s doors were locked, the tenant had cleared out some of their items and called in an administrator. The tenant left behind tables, chairs, fridges, beer kegs, iPad, hundreds of dinner plates and cutlery and a $200,000 fitout that was just two years old. These were all the assets this now bankrupt business had, so the tenant abandoned them for the liquidator. The fit-out included cool rooms, stainless steel benches and cooking equipment, plus a $120,000 rangehood. All these items were custom built for the shop and financed on their own lease with the supplier.

At first, I thought “Thank goodness I have a large bond and the new kitchen fit-out should enable me to attract a tenant quickly”. The typical avenue to pursue the tenant for damages, lost rent and advertising costs quickly closed when I was informed by the administrator that the tenant owed $260,000 to the ATO and the bank. The banks and other secured creditors holding first mortgages will strip any remaining assets well before my claim gets addressed, there would be nothing left.

The sage advice from my lawyer when I locked the doors was “don’t hold your breath for anything other than the bond you’re already holding”. I quickly executed the bank guarantee bond which meant it was no longer an asset of the failed business, it is rent in advance. Therefore removing this as a potential asset for the hungry secured creditors.

The next concern was all the equipment left in the shop, although this made it look occupied for advertising and the future restaurant tenant, it meant I had to dispose of it if the new tenant did not want it. Also, don’t forget the large items (cool rooms, rangehood) were on a lease and the liquidator was requesting a payout of the lease about a month after the default. Note, as the landlord you have the high ground with these fixed assets, they are not in your name, they are large assets and liquidators do not want to remove them as they would have a greatly reduced second-hand value. Ideally they attempt to negotiate a buy-out figure with the new incoming tenant to take on these assets. The advantage for the new tenant is that often the assets can be secured well below their market value, as liquidators typically want a rapid close to proceedings so they can write these distressed assets off their books and close the matter.

With regards to the liquidator, time is on the landlord’s side, until a new tenant is secured and has indicated which assets they wish to keep, the liquidator can’t do anything. In preparation for my new tenant I had negotiated all these leased assets for a price of $14,000, down from its $200,000 position two years earlier. When the tenant finally indicated what assets they wanted, it was only half the items on the liquidators list, I then managed to negotiate these items for just $6,000. However, as expected, the liquidator did not want to incur the cost of removing the remaining assets and simply chose to write them off. I included all this equipment as part of the new lease, instead of a typical 6 month rent-free period for a 5 year lease, the new tenant agreed to 3 months with all the equipment included.

By the time I had a new tenant signed up it was 5 months after originally locking the doors, I then incurred a 3-month rent-free period for the tenants fit-out. The total period of lost rent was 9½ months, the bond accounted for 4 1/2 months of this, but there was also advertising and agents commission for the new tenant which equated to two month’s rent. All up, I was 7 months of gross rent in arrears.

A failed tenant is an unwanted thing to endure, but it is good to know there can be light at the end of a dark tunnel. For me, I secured a new burger restaurant chain that has added value to my building, I now have a new tenant that has invested heavily in his fit-out and signage giving me the confidence that he will be there for many years to come.

Some of the lessons learned from this experience:

  • Avoid tenants that split their time between two or more shops, this usually means their focus is diluted and long hours required to manage two shops tends to be unsustainable.
  • Beware of tenants operating the lease as a Pty Ltd. As a minimum you should request a personal guarantee and where one won’t be provided then a larger bond or bank guarantee should be sort.
  • There’s an old expression, “Cash is King” and holding a large cash bond or bank guarantee was better than a personal guarantee.
  • Do not allow tenants to get beyond 1 month in arrears before you issue a letter of demand to remedy within 14 days.
  • Do not count on anything from a defaulter other than the bond. Any more than this is a bonus, the landlord is an unsecured creditor and often the last in the line of creditors to be paid.
  • If you have a bank guarantee, go to the bank immediately after the tenant defaults to cash it in. You don’t want other creditors making a claim on it.
  • The bond never covers the vacancy time, advertising and rent-free period, so start advertising for a new tenant as soon as possible
  • Consider a rainy day account to cover at least 4 months of the mortgage and outgoing payments, just in case.

There are so many things to consider when purchasing a commercial property. In my blogs I highlight dozens of important questions to resolve, I talk a lot about tenants, lawyers, bankers and agents, but one silent assassin for shooting down a property is whether it is subject to flooding.

As you know one of my favourite locations for securing shops at an attractive return is in Queensland. You will have heard the slogan about Queensland – “Beautiful one day, Perfect the next”.

However, many of us also witnessed with shock the January 2011 floods and saw the TV images of cities and towns near a river or watercourse go under water. In fact, the damage on the economy was so devastating the Federal government imposed a Queensland Flood Tax to help get the state back on its feet. So now when I’m buying a property in Queensland, a critical question I ask the agent is “Did the property get Wet Feet in the January 2011 floods?

If a property is prone to flooding or is listed in the council flood zone, then my advice in Engines of Wealth is simple – move on. I’ve sometimes heard agents say “Oh, it did but that was a one in 100-year flood”. The problem however is that it happened twice in 5 years in the case of Queensland. The impact of a flood can be catastrophic, not just the damage caused on the property but on the very survival of your tenant’s business. You see even if the damage on your property was minimal, the mud and debris left by these floods inside and outside the property takes weeks to clean up and at great cost. If the shop gets wet feet the water damage to internal gyprock walls, carpet and electricals results in thousands of dollars and many weeks of repair.

For many tenants, the water damage is not the biggest problem, it is the loss of trade while repairs are carried out and the time for consumer confidence to return that sends them into bankruptcy. As a buyer you need to understand the motivations of the Real Estate agent for a property that is prone to flooding. When asked by prospective buyers if the property floods, to say “Yes it does” means the buyer will run, to say “No it doesn’t” means a potential reporting breach.

Given their job is to sell the property they will quickly move you off the topic, over the years I’ve heard some great responses:

  • “Great question, I don’t think so but let me check with the owner and come back to you”.
  • Their hope is you’ll forget to raise the question again and fall in love with the property
  • “It did back in 2011 but you must understand that was a once in a life time event”
  • “It did get a little bit of water in it but hey it’s the tenants job to clean it up anyway”. Which is not entirely true: electricals, plumbing, roofing, wall integrity is the landlord’s responsibility.
  • “Does it flood? Not to my knowledge.” If an agent did not ask and was never told by the current owners, that the property floods then an agent cannot be accused of telling a lie
  • “It did but the council has done a lot of work to the drains since 2011 to prevent flooding.”

I have even had agents tell me that a property “to the best of their knowledge” hasn’t flooded only to have the tenant tell me it does and the next time it floods they’re not renewing their lease. As mentioned, for many tenants a flood can be a business ending event.

On the question of flooding, you must do your own research on the property and never rely on an agent’s comments.

There are some great websites that make your job a lot easier. If you’re buying a property in under the jurisdiction of the Brisbane City Council, your first point of research is “Floodwise”, see the link:

At this site you enter a specific property address and it will highlight if the property is in a flood zone and, it will tell you the minimum and maximum heights above sea level for that specific property. As an example, I was recently looking at a property in Orontes Road, Yeronga, Queensland and was concerned about possible flooding given the properties proximity to the Brisbane River. Typing in the specific address to the Floodwise website in seconds it returned the following report:


This graph shows the shop’s land at its lowest point is 6.5 meters above sea level and 8.7 meters above sea level at the highest point on the block. The chart as a reference also shows the level the water reached during the 2011.

Queensland floods at 7.8 meters. Therefore, some parts of the property were quite possibly underwater in 2011. Although this is not conclusive, this report raises alarm bells that require us to keep digging. The next research website I look to judge a property’s propensity to flood, is the council’s online flood maps. A great website is below, select the Flood Maps.

Once again, typing in the property address Orontes Road, Yeronga produces the following output:


The dark blue represents the areas that are most susceptible to flooding and the light blue represents the 1 in 100 year area. Cleary we can see the target property lies firmly within a flood zone and on the edge of the dark blue, this shop has a strong chance of getting wet feet during flood events.

This evidence was enough to halt my interest in this property, however, if the shop had been on the flood fringe, then there is a third website I recommend you investigate. This site shows actual aerial photographs taken during the January 2011 Queensland floods.

The website shows an aerial view of Yeronga before the floods:

Using a sliding TAB you drag across to see the aerial photo during the flood:

This site conclusively answers the question “Did the property it get wet feet in the 2011 floods?” I find these pictures really drive home the importance of doing your due diligence around flooding. It would be heart breaking to find the property you own under water.


We were recently interview by The Leader and questioned about our views on commercial real estate and first home ownership in Sydney. In recent years Sydney property prices have sky rocketed. This has resulted in a lot of first home buyers unable to get into the market. 

One of the key reasons we selected commercial retail shops as the foundation of our wealth engine was due to the low maintenance aspect of these shops. In fact the only real major items of plant and equipment that is the responsibility of the landlord to fix is the hot water system and the air conditioner. The hot water systems are typically not that expensive at around $1,000 installed and will last between 8-10 years. So whilst it’s a good idea to understand how old the hot water system is it typically won’t be a factor in your property due diligence. Read more

One of the key things I like to see when buying a retail shop is a long lease. Not only does a long lease offer you security over future rental payments it wins the banks confidence in the asset as it presents with a higher WALE (Weighted Average Lease Expiry). In Engines of Wealth we discuss the WALE of a building as a measure of the lease term left to run. Read more

In my opinion Depreciation is the secret sauce when selecting retail shops as our wealth building engine. Our wealth building strategy is to create a long lasting income stream that is indexed to inflation and tax effective. Read more

A guarantor must be identified on the tenant’s lease, it could be the tenant or a friend/relative. A guarantor should be a person that has suitable assets to provide security over future rental payments. The subject of a guarantor is not only an important consideration at the time of purchasing a property, it is also important when a tenant has decided to sell their business or assign the lease to another party. Read more

It would be a nice world if everyone did the right thing at the right time, for retail tenants that means paying their rent on the 1st of every month, like clockwork. Unfortunately we do not live in such a perfect world and you may come across a tenant that has poor cash flow and believes it’s OK to use you as his bank and is regularly late in paying the rent. Read more

In Engines of Wealth I discuss at length how to interact with real estate agents from a buyer’s perspective, but when considering them as a tenant and agencies are one of my preferred tenants, there is a twist. When considering the viability of a real estate agent in your shop first you need to ascertain if they are among the 90% that sell residential properties only. Remember the catch-cry “Location, Location, Location”, all areas are not equal and if your shop’s neighbourhood is not providing attractive prices or has too much competition then a real estate agency may struggle. Read more