A Changing Economy – What are the Impacts of COVID19 for Landlords?
These are strange times we are living in.
Petrol prices are below $1. There is tape on the floor at the grocery store. Churches are closed.
And – commercial landlords are facing the prospect of their tenant having cash flow difficulties and/or needing to shut down as a result of the coronavirus.
Landlords are therefore being urged to take a proactive approach and consider options such as rent deferrals or waivers to keep their property occupied.
Landlords of residential premises are also getting enquiries from tenants who have lost their jobs in this crisis, particularly those in the hospitality, tourism, fitness and beauty industries.
With their income dramatically decreased – tenants are therefore requesting rent relief as they struggle to make ends meet.
How to respond to rent relief requests is complicated by the fact that things keep changing, with various announcements from the federal and state governments on rental relief – and now a Mandatory Code of Conduct. Not to mention, landlords still have their mortgage repayments and their outgoings such as land tax, council rates, water rates and building insurance to pay.
We’ve gathered some information and advice, to help guide you through this time.
It’s all about being aware of the impacts of COVID19 for landlords and tenants – and ensuring there is open and honest communication between landlord and tenant.
But if you’d like more help, please get in touch. Our team can ensure you are making the right decisions for you.
Support available to tenants:
The Commonwealth is providing support to tenants in the form of:
- Support for businesses in the form of Cashflow Boost and JobKeeper wages subsidies to employers to keep providing a minimum wage; and
- Rental assistance as part of the Job Seeker payments.
Support available to landlords:
Communication is the key. When assessing the impacts of COVID19 for landlords, they will need to talk to:
- Their bank – to apply for loan repayment freezes, or to reduce repayments to say 50% or interest only. There may also be scope to reduce interest rates. Banks appear to be agreeable to deferring loan repayments for three to six months but interest will still be accruing. The deferred repayments can be caught up on by extending the term of the loan or increasing the monthly repayments once things settle down again.
- Their local Revenue Office/Utilities provider – for rates waivers or payment deferments. Here in the ACT, it has already been announced that commercial property owners with a property AUV of $2 million or less are eligible for a $2,622 rebate on their 2019-20 commercial rates (equivalent to the annual fixed charge) in quarter four. This will be applied automatically.
- Their insurance company – to get future policy renewals paid monthly rather than 12 months in advance;
- The ATO – Some commercial landlords are GST registered and may be able to apply for an interest free deferral of their GST or other tax payments for a few months.
- Their tenants – who should be encouraged in the first instance to apply for government stimulus package relief including ATO tax payment deferrals and the unsecured bank loans for SME Businesses 50% guaranteed by the government.
Impacts of COVID19 for landlords – what are your options?
The progressive options for negotiating rent relief include:
- Rent payment deferral – ie it is still owed but can be paid later when things settle down; or
- Rent waiver – ie a permanent reduction in rent either in full or part. Eg tenant only required to pay 50% of the rent for three months.
Rent relief and the Mandatory Code of Conduct
The new Mandatory Code of Conduct announced in April will be legislated in all states and territories in due course.
It imposes a set of good faith leasing principles for commercial tenancies but only where the tenant is a business eligible for the JobKeeper support ie suffering financial stress or hardship as a result of COVID-19. It is designed to reduce the impacts of COVID19 for landlords and tenants.
We suggest that the principles should also be considered by Landlords & Tenants in their negotiations even though not compulsory.
The overarching principles of the Code include:
- Landlords & tenants need to work together to ensure business continuity and the resumption of normal trading activities after a reasonable recovery period.
- Landlords & tenants need to negotiate, in good faith and in an open, honest and transparent manner.
- Each needs to provide sufficient and accurate information in the context of negotiations.
- They need to negotiate appropriate temporary leasing arrangements and to work towards achieving mutually satisfactory outcomes.
- Any agreed arrangements are to take into account the impact of COVID19 on the tenant, with specific regard to its revenue, expenses and profitability and be proportionate and appropriate based on that impact.
- Each lease is to be considered on a case by case basis.
The rent relief requirements of the Code include:
- Landlords must not terminate leases due to non-payment of rent during this pandemic;
- Tenants must remain committed to the terms of the lease (or they forfeit the protections offered by the Code);
- Landlords should offer rent waiver or deferrals in proportion to the reduction in the tenant’s revenue (eg 100% reduction if shut down; or 30% waiver/deferral if tenant revenue decreased by 30%).
- Rent waivers should be no less than 50% of the total rent concessions (eg if tenant revenue decreased by 30% then 15% of rent is waived and 15% is deferred). Tenants may waive the requirement for the 50% minimum waiver.
- Any amount of rent deferred must be spread out over the balance of the lease term and for a period of no less than 24 months, whichever is the greater, unless otherwise agreed by the parties.
- No fees, interest or other charges are to be applied to the deferred payments.
For full details please see the National Cabinet Mandatory Code of Conduct.
Landlords of vacant properties may have to be more flexible with their expectations for new leases. For example, shorter lease terms, different tenant types, or making smaller areas available.
Because of the potential impact on property values if this crisis is not resolved soon, it would also be wise for landlords to have new leases prepared including market rent reviews for the first year or two of the initial lease term.
In this together
These are challenging times. But, by being flexible and communicating regularly with tenants – hopefully both landlords and tenants can negotiate arrangements that work for both parties.
If you need any assistance particularly with cash flow management or tax relief measures please give us a call.
Our team can go through all the fine print with you, to ensure you can set up the best arrangement for your situation.