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Bradley Ross, Partner Business Services provides his expert advice in this guide to assist landlords receiving requests from tenants requesting rental assistance.
Even the most ardent skeptics would have to admit that the Coronavirus is more than just another cold. The impact on businesses and the wider community is unprecedented and we are seeing a range of outcomes for our clients, but what is common amongst it all is the uncertainty of the situation. This uncertainty is requiring businesses to assess all their spending habits and where possible seek reductions in high cost compulsory expenses. One of the major expenses for businesses apart from inventory and wage costs is rent and we are seeing an increasing number of enquiries coming from landlords about requests from tenants for rental assistance.
Whether you own your property directly, through a trust or even your self-managed superannuation fund, there are a number of common things that you need to consider before granting any rental concessions:
- Any request from a tenant should be in writing, even if it is a related party. The request from the tenant should provide details of what is being sought and the reasons why they believe that rental relief is warranted.
- Does your lease allow you to modify the terms of lease mid-way ? In some rare cases the lease may not provide for any variation of the lease terms or provide for any concessions and may require the lease to be terminated and a new lease entered into;
- Has the tenant actually been significantly impacted by the Coronavirus? You should seek some form of confirmation from the tenant that their business has actually suffered a downturn as a result of the Coronavirus. This could be in the form of profit and loss comparisons, revenue forecasts, profitability forecasts, cash flow forecasts or forced shut-down notices. Any information provided should be considered in light of the tenants’ business (can their staff continue to operate from home etc) and of course should be kept confidential;
- What is the relationship that you have with the tenant like – have they always paid their rent on time, do they keep the property clean & tidy, have they generally been complying to the terms and conditions of the lease, how long have they been a tenant, etc.;
- What is the impact of providing the requested support – will it impact your ability to service your loans and meet other financial obligations? Where providing rental support may impact your ability to service your loans, you should contact your financier to see what support they may be able to provide you during the period of reduced or no rent;
- What is the impact of not providing the request – what will be the lost revenue in the short and medium term whilst a new tenant is found, what concessions you would have to give to your new tenant, how long is remaining on the lease, etc. In some cases providing rental relief to an existing tenant will be cheaper than trying to find a new tenant;
- Does the request for rental assistance include a request to adjust outgoings if the tenant is liable for them. Care needs to be taken to avoid the situation where you have no rental income to cover the outgoings. When assessing the request you should also consider the impact of any stimulus measures that would flow through to the tenant (e.g. land tax deferrals);
- Are there alternatives to what the tenant is proposing that may provide them with some rental relief, but also allow for cash to continue to keep coming in? Some of the options you may want to consider include:
- rental waiver for a defined period. This would require you to survive off your other income or savings. If this option is considered then we would recommend that the tenant still be required to pay the outgoings;
- reduction in rent for a defined period. This option still provides some cash flow to reduce the impact on your savings;
- partial or full rent deferral for a defined period with the recovery period defined – for example a 3 month deferral of rent until 30 June, then the deferred rent recovered over the following 6 months;
- for self-managed superannuation fund landlords, will the rental assistance impede the fund from being able to meet their financial commitments, including making minimum pension payments to retain the tax free status on pension income. This will be important especially where the member’s pension account has grown in excess of the $1.6m Transfer Balance Cap.
Once you have determined whether to agree to their proposal, decline it, or put forward an alternative solution, you should communicate this to the tenant in writing.
When you and the tenant have agreed on the rental assistance to be provided, this should be documented in a lease variation agreement which is to be signed by both parties. The legal fees associated with drawing up this agreement should be negotiated with the tenant before any costs are incurred (again preferably in writing).
It is essential for self-managed superannuation fund landlords who lease property to related parties that the rental relief that you provide is no more favourable to the tenant than they would have received had they leased the premises from an unrelated party. In demonstrating this, documenting the process undertaken will be of paramount importance.
It should be noted that in New South Wales, new, temporary, legislation (COVID-19 Legislation Amendment (Emergency Measures ) Act 2020 [COVID-19 Act]) has now come into effect which allows the minister to make regulations that impact retail and residential landlords. Whilst the legislation has passed, we are yet to see the regulations from the minister, however, these are expected to include prohibiting the landlord from evicting tenants, locking tenants out of the premises and terminating the lease.
Interestingly, the COVID-19 Act only allows the minister to make regulations in relation to retail or residential leases and doesn’t cover commercial leases (factories, office space etc). It does not appear to provide any rental comfort/abatement nor address the commercial issues flowing from any delay in carrying out tenant’s obligations under a commercial lease (i.e. paying the rent).
Finally whilst the anticipated regulations will prohibit the landlord from taking the normal course of evicting delinquent tenants landlords are still entitled to demand full payment of rent, outgoings and other monies from tenants.
We anticipate that further changes will be introduced by the New South Wales Government regarding commercial leases and that other states will follow New South Wales’ lead and make changes to their tenancies acts.
If you have any questions or concerns over a request you have received from your tenant or want to discuss any arrangements already made, please contact one of our friendly team members.
