The Prime Minister has stated that the states and territories are moving to put a moratorium on commercial and residential evictions as a result of financial distress.
Code of conduct for commercial tenancies
The Prime Minster has announced that the states and territories will legislate a mandatory code of conduct for commercial tenancies – see National Cabinet Mandatory Code of Conduct.
The code applies where:
The code brings together a set of good-faith leasing principles. Landlords must not terminate the lease or draw on a tenant's security and tenants must honour the lease. Landlords will be required to reduce rent proportionate to the trading reduction in the tenant's business, through a combination of waivers of rent and deferrals of rent over the “pandemic period.” Waivers of rent must account for at least 50% of the reduction in the rental provided to the tenant during that period and deferrals must be covered over the balance of the lease term and in no less period than 24 months.
The arrangements are overseen through a binding mediation process at state and territory level.
EXAMPLE 1:
- Assume an eligible tenant pays $5,000 per month in rent
- They also pay $500 of cleaning outgoings
- Remaining lease term is 16 months
- Their business has completely closed down – turnover down 100%
- They satisfy the JobKeeper conditions, etc
Application of the Code
- Tenant and landlord agree on the terms of the new arrangement
- At least 50% of the $5,000 pcm rent is to be waived (50% of the 100% drop in turnover)
- This rent payable is $2,500 per month
- $2,500 is rent free per month
- The $2,500 per month to be deferred and payable over 24 months (even though the remaining lease is 16 months)
- Outgoings – landlord to seek to waive recovery and is entitled to stop the cleaning charges
- No fees, interest etc are payable on the rent waiver or the rent deferral
- Landlord to seek appropriate bank, state and local government relief and pass this on in the appropriate proportion
EXAMPLE 2:
- Assume an eligible tenant pays $5,000 per month in rent
- They also pay $500 of cleaning outgoings
- Remaining lease term is 16 months
- Their business has suffered a downturn of 30%
- They satisfy the JobKeeper conditions, etc
Application of the Code
- Tenant and landlord agree on the terms of the
new arrangement
- At least 15% of the $5,000 pcm rent is to be waived (50% of the 30% drop in turnover)
- This rent payable is $4,250 per month
- $750 is rent free per month
- The $4,250 per month to be deferred and payable over 24 months (even though the remaining lease is 16 months)
- Outgoings – landlord to seek to waive recovery and is entitled to stop the cleaning charges
- No fees, interest etc are payable on the rent waiver or the rent deferral
- Landlord to seek appropriate bank, state and local government relief and pass this on in the appropriate proportion
Residential landlords and tenants
Most states and territories have introduced rules to ensure that tenants facing COVID related financial distress are not evicted for rental arrears. Rent remains due, however landlords are encouraged to negotiate either a rent reduction to some degree or waiver where possible – for example, the landlord has a mortgage and has received a freeze on mortgage payments.
Most state and territory governments have free mediation services in place to manage disputes. Each State has different rules, for Victoria this includes new laws that are being introduced into Victoria’s Parliament to help protect residential tenants facing hardship as a result of the coronavirus (COVID-19) pandemic. The laws will apply from 29 March 2020 until 26 September 2020, and will apply to landlords of a residential property, the operator of a rooming house, the owner of a caravan park, or a provider of specialist disability accommodation.
The laws prevent tenants being evicted (except in specific circumstances such as damage to the property, use it for criminal activity, or serious violence occurs).
Tenants will still have to pay rent but they can:
Rents cannot be raised over the period of the new laws.
Tenants may be able to apply for rent relief. See Coronavirus (COVID-19) rent relief grant.
See Coronavirus (COVID-19) and your rights
See Residential tenancy and commercial tenancy
Bank support for landlords who do not evict commercial tenants
The banks have announced that they will provide relief to commercial property landlords who undertake that for the period of the interest capitalisation, they will not terminate leases or evict current tenants for rent arrears as a result of COVID-19.
SMSFs with commercial property that provide rent relief to a related party
For some businesses, the business owner’s SMSF (or a related party) owns the commercial property that the business leases. Normally, the leasing arrangement between the business and the SMSF must be at market value to fulfil the SMSF’s obligations under the Superannuation Industry Supervision Act. If the SMSF reduces the rent because the business is in financial distress as a result of COVID-19, the SMSF will not face action by the ATO. The ATO has stated:
“Some landlords are giving their tenants a reduction in or waiver of rent because of the financial impacts of the COVID-19 and we understand that you may wish to do so as well. Our compliance approach for the 2019-20 and 2020-21 financial years is that we will not take action where an SMSF gives a tenant – who is also a related party – a temporary rent reduction during this period.”
To qualify for rent relief, there are a number of issues that trustees should document:
Taking these steps will help mitigate any potential compliance breach by your fund and reduce the likelihood of audit activity by the ATO.
It is important to balance the immediate needs of the related business with the long-term goals of the SMSF. The fund’s sole purpose to
provide retirement benefits for members should be considered before any rent reduction is granted.
Tax deductions for rental property owners
Where a residential rental property owner reduces the rent to enable tenants to stay in the property, the ATO has indicated that this should not impact on the deductions that can be claimed by the landlord. The ATO has also confirmed that landlords can continue deducting normal rental property expenses if a tenant is not able to pay their full rent or have temporarily stopped paying rent because their income has been adversely affected.
If the landlord’s bank defers loan repayments for a period of time, the property owner can still claim a
deduction
for interest expenses if interest continues to accumulate on the loan.
For further information and expert assistance, contact us today by email
or phone on 03 5911 7000. Our team is all working remotely to maintain social distancing regulations with client meetings being conducted
via Zoom. Our operations are fully cloud based and our service to you will not be affected.
A new issues paper from Treasury’s Competition Review questions whether non-competes and other restraints are limiting job opportunities and movement.
For many small business owners, their business is their largest asset and for many, one that is expected to help fund their retirement.
