There are a number of reasons why one may want to sell or transfer the right to receive rental income from a leased property. They include: (1) The desire to convert the future rental payments into an upfront capital amount by selling the right to receive rental income; (2) estate planning purposes and the desire to move income from one entity to another without transferring the property itself and without incurring the consequent stamp duty imposition. A concurrent lease is a useful commercial tool which may be appropriate in both of these circumstances.
A concurrent lease is a lease of property which is already leased. The concurrent lease must commence before the previous one ends and the previous lease must be noted in the “Encumbrance” panel of the concurrent lease to which the latter lease is subject. The concurrent lease would also make it clear in its terms that it is a concurrent lease of the property and that it is subject to the earlier lease. The legal effect of the concurrent lease is that the new lessee becomes entitled to be paid all rent and to otherwise stand in the shoes of the landlord.
A concurrent lease is a lease of the landlord’s reversion (ie the landlord’s interest in the lease and of the landlord’s interest in the land when the first lease comes to an end). The concurrent lease does not in any way affect the earlier lease or the right to possession of the land by the lessee of the earlier lease. The two leases exist concurrently during some part of their respective terms. The concurrent lease can finish at the same time as the earlier lease, before or after the earlier lease.
In South Australia there is no longer stamp duty payable on leases so a concurrent lease may be an ideal way to transfer rental income from one entity to another without a stamp duty imposition. This would not be available where the concurrent lease is granted for a premium or a capital sum (in which case it is likely stamp duty is payable).
Concurrent leases are used where property owners with leases of small portions of their land to Telstra or Optus (for telecommunication towers) wish to sell the rights to future income for an upfront capital payment. Telecommunication tower leases are normally for periods of 5 years but the lessee generally has a right to terminate the lease at anytime with 6 months notice in writing to the landlord. There is always a risk therefore that the rental income from the tower lease could cease at any time. Landlords that are looking for a capital upfront payment without having to sell their land can therefore use a concurrent lease structure to sell the income rights from the lease.
Indeed, a concurrent lease can be used in any situation where a landlord wants to “cash in” and an investor wants to take the risk of the lessee not renewing. Obviously in those circumstances the investor will want to see a return on their investment that takes into account the risk of the tenant leaving or not continuing to pay rent for any other reason.
The terms of concurrent leases can be quite simple where all that is required is the right to receive income from an existing lease. However, if the intention of the concurrent lessee is to have rights to continue leasing the land after the earlier lease has come to an end, the terms of the concurrent lease will in all likelihood resemble those of the earlier lease and can become quite complicated.
Obviously landlords should take accounting advice as to potential capital gains tax consequences of selling their rental incomes or transferring to related structures.
For further information about concurrent leases or considerations related to the sale of income rights associated with Telstra and Optus tower leases, please contact Danny on 8362 6400 or email Danny Beger. Join our mailing list to receive updates and advice on current issues.