By Liad Hadar, Director of Hadar Incorporated, Specialist Property Law Firm
This article first appeared in Asset Magazine’s October 2022 edition

The onset of financial year end is often a flurry of preparation; and should not be limited to the financial department. Property owners, asset managers and their teams often require the assistance and input of their legal partners as part of these preparations too.

As property lawyers, my team and I frequently provide input for our clients’ financial year-end preparations. This is done in accordance with audit and other regulations and also to assist with preparing the year-end financial packs for shareholders and other important stakeholders. Regrettably, it’s still often a reactive process. I believe greater benefit could be derived through a more proactive approach, to help prepare property owners and asset managers against unforeseen financial losses as well as managing any associated expenses more effectively.

Bad debtor write-off motivations

One of the primary functions provided to property owners by a property lawyer is to prepare a well-reasoned motivation for bad debtor write-offs, based on a sound legal appraisal of the circumstances. To be proactive, the best practice is to do this throughout the financial year and not only at year-end. This real-time approach assists in having the necessary documentation and information on hand, reducing the need to scurry at the last minute.

An accurate, well-managed debtors’ book is crucial to property owners. It not only serves as a yardstick for projected income and as an annual performance review on rental collections, but also provides a means of writing off bad debts within the financial year so that the property owner can claim a tax deduction based on the loss of revenue.

No matter how well-subscribed a property may be, bad debts do occur. In order to benefit from the tax write-off that can be claimed against such unrecoverable debts, it is best for a property owner to obtain a written and substantiated motivation from their lawyers for such a claim.

A lawyer assisting with your debtors can help prepare a written write-off motivation which is generally template-based to contain key information, including:

• The tenant’s identity and other relevant details such as security for the debt
• The premises being leased
• The amount owing to the property owner
• A summary of the steps taken to collect the amount owing
• A reasoned motivation as to why the lawyer believes the debt should be written off.

To explain, there are several factors that may support a decision to write off a bad debt:

• The tenant may have already vacated the premises. In cases like these, tracing an absentee tenant is not always viable. If a tenant has left due to bad debt, they will usually not have relocated to another business premises – precisely because they are often already in debt to a previous landlord and other creditors. Therefore, the cost and time incurred to locate the tenant may be considerable
• The tenant’s business may no longer be trading
• There may be no assets to claim
• There may be no surety or other cover against which to claim

A property lawyer will provide an accurate cost analysis and practical advice involved in obtaining judgment and pursuing execution, and in the case of a bad debt write-off, demonstrate the likelihood of not being able to effect recovery of the debt.

Claims against the property owner

Claims may be lodged by any party against a property owner, for a variety of reasons. Common examples include a patron being injured on the property owner’s premises. If something like this happens, the incident should be noted in the financial year-end reporting, and an opinion submitted on the prospects of a successful claim against the property owner.

A claim may typically involve a letter of demand or a summons issued against the property owner. A property lawyer can then provide a qualified opinion on the strength of the claim and potential liability. If, for example, a patron tripped or fell and was injured, but warning signs were displayed or the staff at the premises took reasonable steps to avoid such injury, then the likelihood of liability is significantly reduced. The lawyer will also establish whether there is specific insurance in place to cover such claims, and the extent of such insurance.

Another common scenario is that of a contractor suing a property owner for breach of contract – and depending on the scope and service, there could be substantial sums involved, sometimes running into millions. In such a case, the lawyer can help determine the conditions, exceptions, or extenuating factors. For example, if a contractor has not abided by the terms of work, they themselves may be in breach of contract and this also reduces the likelihood of liability or the validity of a claim which will be relevant for the financial reporting.

Evaluating the prospects of recovery

In addition to absconded tenants, there may be tenants who are current debtors: tenants currently in occupation of the property owner’s premises but in default of their obligations. The lawyer will provide input into each matter regarding pending litigation, and the prospects of recovery of current debts owed. The lawyer will also list the steps taken to recoup such debt – the parties concerned, the amount owed, security in place, confirmation of a summons being issued, judgment obtained, etc.

Here, the same rational analysis applies as with former tenants. Having a view on one’s prospects of recovery enables an informed decision as to whether it is worthwhile proceeding with litigation, or not. This particular aspect of the lawyer’s input is relevant for budgeting purposes, as well as estimated recoveries, vacancies (when the legal action includes ejectment) and the possibility of these current debts becoming bad debts.

Choose wisely

Property owners should aim to work with experienced and specialist property lawyers who are results-driven and concise in their approach, and who will partner in accomplishing the property owner’s key objective, namely achieving collections targets and budgeting accurately. With a view to true and valuable partnership, this should be done while maintaining legal spending within realistic and reasonable parameters.

Ensure that your legal partner can fulfil the role of a trusted partner and advisor. In addition to the relationship, on a practical note, it is not too much to expect that they demonstrate good fiscal practice, as follows:

• Set fee structures rather than open-ended billing
• Open and transparent communication about the expected costs and process, rather than simply pursuing litigation as a matter of course
• Staying well within budgetary constraints, and ensuring the property owner, asset manager and team are able to accurately predict and control expenses
• Reporting back positively on recoveries – as well as pursuing debtors effectively, professionally, and judiciously.

I believe that it is crucial for property owners to partner with a property law specialist who will assist you in preparing for your financial year end, expertly and professionally, throughout the year and at year-end!