‘Seriously deficient’: Rent relief code missing key element
An SMSF administrator has called the government’s mandatory code for commercial rent relief “seriously deficient”, saying it seeks to deal with a three-point problem by only addressing two of them.
Last week, the government announced a new mandatory code for the provision of rent relief by commercial landlords to tenants.
But according to SMSF Alliance practice principal David Busoli, despite acknowledging that rental relief needs to be addressed via consultation between the tenant, landlord and the landlord’s banker, the code ignores the landlord’s banker as an important element of that consultation.
He said this places the landlord in a difficult position if their bankers do not co-operate.
“The government’s code is seriously deficient as it seeks to deal with a three-point problem by addressing only two of them,” Mr Busoli said.
“Essentially, the code gives a tenant, with a reduction in turnover of at least 30 per cent, a rental accommodation for the COVID-19 period of at least that amount. The concession is based on the tenant’s reduction in turnover, not their ability to pay.
“In contrast, the landlord must make the accommodation without reference to their ability to withstand the income deficiency, though there are some negotiable points at the margins that take the landlord’s financial capacity into account.
“The government’s expectation is that the landlord’s bankers will assist — but this is by no means guaranteed — creating a very real possibility that the landlord will be affected far worse than the tenant.”
Mr Busoli pointed to an example that comes from the code, which states:
Qualifying tenants would be provided with cash-flow relief in proportion to the loss of turnover they have experienced from the COVID-19 crisis, i.e. a 60 per cent loss in turnover would result in a guaranteed 60 per cent cash-flow relief.
At a minimum, half is provided as rent free/rent waiver for the proportion of which the qualifying tenant’s revenue has fallen.
Up to half could be through a deferral of rent, with this to be recouped over at least 24 months in a manner that is negotiated by the parties.
So if the tenant’s revenue has fallen by 100 per cent, then at least 50 per cent of total cash-flow relief is rent free/rent waiver and the remainder is a rent deferral. If the qualifying tenant’s revenue has fallen by 30 per cent, then at least 15 per cent of total cash-flow relief is rent free/rent waiver and the remainder is rent deferral.
Care should be taken to ensure that any repayment of the deferred rent does not compromise the ability of the affected SME tenant to recover from the crisis.
The parties would be free to make an alternative commercial arrangement to this formula if that is their wish.
Based on the above example, Mr Busoli said there is no mention of the landlord’s financial ability to fund this.
Based on recent discussions he has had regarding instances of bank concessions to property owners, Mr Busoli said that, while it is still early days, such concessions being provided to landlords vary widely.
“I have had reports of three- to six-month interest capitalisation but also outright refusals. Sometimes the refusal has been on the basis that any accommodation would be against the law, including the SIS Act. This is clearly nonsense,” Mr Busoli said.
“The government has been tackling this national emergency with imagination, courage and resolve. Their actions have been commendable to date. It is for this reason that I am hopeful that another announcement will be forthcoming to rectify the problems that this particular ‘solution’ has created.”
Adrian Flores is the deputy editor of SMSF Adviser. Before that, he was the features editor for ifa (Independent Financial Adviser), InvestorDaily, Risk Adviser, Fintech Business and Adviser Innovation.