Insight

First moves on rent relief

In his statement after the National Cabinet last week, Scott Morrison announced only one element of the plans for rent relief to deal with growing loss of income being experienced by Australians: a moratorium of 6 months on evictions due to financial distress.

While there isn’t any formal detail, the message was clear – this will be a long haul for all of us and we are in this together, so everyone is having to make sacrifices and share the pain.

The State Treasurers were put to work by the National Cabinet to come up with an agreed set of principles that each state will work to in aiding commercial tenancies. The guidelines announced include: 

  • a moratorium on evictions for 6 months for non-payment of rent due to financial distress as a result of COVID-19
  • encouraging parties to commercial leases to come to an agreement on relief or temporary amendments to the lease
  • rent reductions or waivers for defined periods for impacted tenants
  • providing the ability for tenants to walk away from leases on the grounds of financial distress
  • requiring landlords to pass on the concessions afforded to them by Government or financiers
  • a business as usual approach for lessees who are not financially impacted
  • an approach of sharing the pain between Landlords, tenants, financial institutions and all levels of Government.

There are more details to be worked through and announced by each State as they put their own version of the principles in place. However, the objective (and There is concern in the industry that the principles have gone too far in allowing tenants to walk away from lease obligations and the flow-on impact on the landlords is much greater – including the impact on valuations and covenants that come from a loss of tenants. For instance, where commercial leases include a ‘make good clause’ requiring the tenant to undertake works to restore the property to its original condition (or ready for another tenant), will the termination of the lease release the tenant from this obligation, or result in an additional cost at a time when they are unlikely to have the cash available to undertake these works? Either way, the landlord is left in the lurch and in many instances, needing to outlay costs before they can begin the search for a replacement tenant in a tough market. It might be that this allowance has gone too far and goes beyond the “pause” we were looking for and moving it more to a full stop, which could have much greater implications.

Self-funded retirees and those in the investment market who generate income from passive investments for themselves and others have already felt the pinch of record low-interest rates, companies slashing earning predictions and dividend payments and now most certainly a loss of rental income. So there is more pain to come. The financiers have been asked to recognise this and do their bit when it comes to mortgage relief for both commercial and residential arrangements, so landlords come out of this without exorbitantly larger loans due to the interest accumulation compounding the problem. It is also expected that all levels of Government will do their bit. At a State level, consider concessions or holiday’s on land tax, while local governments look at concessions on rates. We’ve already seen Victoria and now South Australia come forward with some level of relief, but we hope to see this expanded in line with the announcements from National Cabinet. However, is it too much to ask that the principles agreed by all State Governments are introduced with some level of harmony across each of the States? As anyone investing or doing business across our state borders knows, the rules can be very different and what we need now is a lot less complexity.

While we wait for the further detail to come from each of the States around their version of the agreed principles, the message has been for communication to commence between tenants and landlords and come to their own agreements. The Government will not want to come in over the top of already agreed arrangements or terms offered by Landlords, however, they will need to afford tenants a minimum level of protection and provide concessions to landlords to help them in providing that leeway.

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