The good news is that it looks like we’ve finally turned the corner. After months (or what seemed like years if you were home-schooling your kids) of lockdown, the restrictions are easing, and we’re finally getting back to normal.
The bad news is that the economic shock waves resulting from COVID-19 promise to reverberate for quite some time. Coming hard on the heels of the devastating bushfire season, a slowdown was inevitable. With the Government officially conceding that we are in a recession, economic pundits are forecasting an extended period of financial hardship, with the worst still to come.
You don’t need an economics degree to know that the property market has experienced a profound impact from these twin shocks. With businesses shuttered, companies going under and working from home becoming the new norm, the commercial real estate industry is experiencing particular pressure.
Fortunately, the Government has stepped in to provide some welcome relief. As we brace ourselves for some rough waters ahead, the time is right to look at what your rights are as a commercial property investor.
On the one hand, commercial landlords impacted by the dampening of the market need to protect their rental income. On the other, many tenants are experiencing a massive downturn in trade, or have temporarily shut their doors entirely. Finding a way to allow businesses to hold on to their premises while ensuring that the owners do not suffer disproportionately is a delicate balance. It’s all very confusing. So, let’s see if we can clear it up:
What Happens If My Commercial Property Tenant Can’t Pay Their Rent?
The Victorian Government has instituted a Commercial Tenancies Relief Scheme. Under this plan, you are obligated to negotiate with your tenant in good faith to come to an arrangement that will allow them to remain in their property. This is not a get out of jail free card for tenants. Certain conditions must be met, and relief measures are in place to offset losses for landlords.
Who Is Eligible for Commercial Property Rent Relief?
In the current climate, a common-sense approach is always the best policy. Any landlord and tenant are within their rights to re-negotiate a lease at any time. However, with respect to COVID-19, a tenant’s right to negotiate is reinforced by the CTRS. Under the scheme, a tenant is legally entitled to relief if they meet the following conditions:
- They are a small-to-medium enterprise with an annual turnover of less than $50 million.
- They qualify for and are participating in the Federal Government’s JobKeeper scheme.
How Does a Tenant Apply for Commercial Property Rent Relief?
To ensure that opportunistic tenants do not abuse the system, the onus is on them to make an application and to provide all the required evidence that they qualify for the scheme. Your tenant is required to provide the following items to initiate the discussion:
- A written request for rental assistance
- Written confirmation of their eligibility
- Proof of eligibility, including;
- Evidence that their turnover is less than $50 million
- Evidence that they are participating in the JobKeeper scheme
- A statement that the lease is an eligible lease for the purposes of this scheme
Without these items, you are under no legal obligation to discuss rent relief. However, as we mentioned previously, in these extraordinary times, all landlords are strongly encouraged to have in-good-faith discussions with their tenants, irrespective of their size or circumstances.
What Does the Landlord Need to do Once an Application for Commercial Property Rent Relief is Received?
Once you receive a valid application, you are required to respond in writing with an offer of rent relief within 14 days, unless you and your tenant agree on a different timeline.
Relief can take any form that you agree upon with your tenant. However, at least 50% of the value must be in the form of a waiver. So, if you negotiate assistance of $1000 per month, a minimum of $500 per month must be a reduction in the rent. Both parties are at liberty to discuss other forms of assistance that work for both parties.
Any agreement between you and your tenant come to must be in effect until at least September 29 of this year.
It’s crucial to remember that each of these criteria represents the minimum legal requirements. As we’ve already mentioned, COVID-19 has affected all sectors of our economy and society as a whole. It is therefore critical to approach any application with an open mind, have an honest discussion with your tenant and be prepared to offer a reasonable level of flexibility, if needed.
What Factors Do Landlords Need to Take into Account When Assessing an Application for Commercial Property Rent Relief?
This is a tricky and complicated process. It’s imperative that both the tenants needs and your rights are taken into account to avoid either or both parties from losing on the arrangement. This scheme is not a blanket excuse to pay zero rent. The tenant must still pay as much as they can afford. To make sure that you get the balance right, you must take into account the following when determining how much assistance to provide to your tenant:
- The tenant’s reduction in turnover during the COVID-19 crisis
- Any non-rent waivers that you are providing to clients that are helping to reduce their costs
- The tenant’s ability to pay rent without rent assistance. This ensures that cashed-up tenants do not benefit unduly simply because their turnover is down. If they can afford to pay rent, they must
Like any negotiation, the arrangement needs to take in the position of both parties. Therefore, you will need to also take into account your circumstances, including:
- Your financial ability to offer rental assistance. No landlord needs to provide more support than they themselves can afford
- Any reduction in your outgoings as a result of the reduced use of the premises. For example, you may have reduced cleaning, maintenance and related expenses while the property is seeing less daily traffic
- Any economic relief benefits that you are receiving that would offset the loss of rental income
How to Finalise a Commercial Property Rent Relief Agreement with Your Tenant
There are no complicated formalities involved. All you need is a written agreement signed by both parties, and you’re good to go. If you or your tenant prefer something more formal, you can include the agreed measures as amendments to the existing lease. However, this is not a legal requirement.
What Can Landlords Do if a Commercial Property Tenant Refuses to Negotiate?
If your tenant has simply stopped paying rent, has unilaterally reduced their rent payments without an agreement, or refuses to negotiate on terms, you can apply for free mediation with the Victorian Small Business Commission (VSBC). You should supply a copy of the current lease, and any other supporting documentation.
A VSBC case officer will contact both parties to try to sort out a quick and easy solution that’s acceptable to all. If he or she is unable to make progress, they may book you in for a mediation session.
If your tenant refuses to attend the mediation session and all other attempts to negotiate fail, the VSBC will issue you with a letter to that effect, allowing you to take the matter to VCAT.
Can Commercial Property Landlords Evict a Tenant Who Cannot or Will Not Pay Rent or Negotiate?
Not at the moment. As there is currently a six-month moratorium on evictions due to non-payment of rent, you are not able to evict a recalcitrant tenant until after September 29.
What Relief Measures Are Available to Commercial Property Landlords Who Have Been Financially Impacted by COVID-19
As we’ve seen, part of this complex equation involves accounting for relief that has been made available for commercial property owners.
Like any business, landlords may be able to qualify for all relief measures if they meet the required criteria. Speak to your accountant to see whether you are eligible for measures such as:
- JobKeeper Payments
- Commonwealth Temporary Cash Flow Payments
- Victorian Government Business Support Fund
Depending on the structure of your entity, these and others may provide some substantial relief. For more detailed information on these and other general measures, check out this excellent summary of all available COVID-19 Relief Measures.
Additionally, the Government has implemented temporary laws which make it easier for banks and other financial institutes to lend money to businesses during this time. Speak to your current lender or lenders to see whether this may assist you in accessing funds to help you through the difficult times.
More specifically, however, the CTRS provides for some assistance to commercial landlords who are offering rent relief to their tenants.
- Deferral of Land Tax for Small Investors: If you own at least one commercial property and your total portfolio value is under $1 million, you will be eligible to defer your Land Tax payment until after December 31st.
- Land Tax Reduction: Any commercial property owner who is providing rent relief to their tenants or is unable to find new tenants for unoccupied or vacated property due to the current climate is eligible for a 25% reduction in 2020 Land Tax. You will need written statements from your tenants stating that they are receiving rent relief from you. Business Victoria has made a convenient form available for this purpose.
As with any business arrangements, your guiding principle needs to be a mutual agreement that is in the best interests of both parties. One inspiring outcome of COVID-19 has been the way that individuals and communities have pulled together, shouldering each other’s burdens and making sacrifices to help each other through this unprecedented time.
Now that you know your rights and obligations, bring that same good faith and spirit of cooperation to the negotiating table, and you’re sure to find a solution that will help you and your tenants through to better days.