Widespread confusion over capital works carried out in rentals is costing investors and tenants thousands of dollars in unnecessary legal fees, according to valuation experts.
David Tunbridge, who heads up property valuer Opteon Victoria's hospitality division, said confusion often results in ‘rent shock’ and that educating tenants and landlords could save considerable time and money.
Mr Tunbridge said tenants, often unaware of the impact of capital works, receive a rude shock when their rent review comes around.
“Having completed and paid for capital works, tenants are often surprised to find that the increased value of their property has resulted in a rent hike, leading to rental disputes,” he said.
According to the Retail Leases Act (2003) of Victoria, the landlord is responsible for undertaking any capital works, which are classified as structural works that will become the property of the landlord once the lease expires.
Tenants are only responsible for carrying out their own internal fit-outs, which can include items such as air-conditioning units and, in some cases, kitchen equipment and bathroom amenities.
“Even though landlords are obligated to undertake capital works on a tenant’s behalf, tenants often decide to undertake capital works themselves, and it is in this scenario that disputations can arise,” said Mr Tunbridge.
“If a tenant does undertake capital works on a building, for example installing a lift or painting the outside of the building, and they don’t have a written agreement in the lease to disregard these improvements when it comes to a rent review, the tenant can often get burnt,” he said.
"In other words, what we see we have to value, regardless of who paid for what.”
Disputes arise when the tenant is informed their costly improvement has added to the property's market value, and consequently the market rent, according to Mr Turnbridge.
“Often when I am appointed to determine the market rent in a dispute between the landlord and tenant, the tenant will submit to me that certain capital works were added to the premises at the tenant’s expense and therefore should be ignored in making my determination of fair market rental value,” said Mr Tunbridge.
“Unfortunately, given those capital works should be the responsibility of the landlord, I am compelled to deliver my determination on the basis that those capital works have or will merge with the building and are deemed to now belong to the landlord.”
Mr Tunbridge said the simple solution is to have an agreement in writing between the tenant and landlord.
“If you are going to make capital works to your building as a tenant, make sure you have an agreement in place with the landlord to do so, and a written and signed directive to a valuer in assessing the market rent to ignore those capital improvements made by the tenant,” he said.
“If both parties meet, talk and agree on how best to share the cost of capital works before they are undertaken, it can be a win-win for both sides.”