Victorian rent relief scheme requires landlords to carry a heavy load

Melbourne street

Source: Unsplash/Kevin Laminto.

It’s hard to sell sympathy for commercial landlords. 

As a group, they are much maligned — treated as the ticket clippers who pocket the result of other business people’s hard work. 

It’s not a fair description, but it is a pervasive one, and yet if landlords ever deserved a little sympathy, it’s now.

As we hurtle towards the 18month anniversary of the state of emergency being declared in Victoria, the property sector has been locked into another round of rent relief for tenants, some of them already facing large deferred-rent debts. 

For those tenants, often unable to open or work, there is little money coming in the door and the supports of 2020, such as JobKeeper, are no longer in place to underwrite the payroll or provide a cashflow boost. 

That means paying the rent is pushed down the list of priorities of a business trying to stay afloat, a trend being reflected in rent returns nationwide. 

Data from commercial rent collection group Re-Leased suggests prior to the pandemic, around 89% of rent due by the commercial sector was paid within 27 days, with punctuality slightly higher in office and industrial leasing and slightly lower in retail. 

As of June, however, just 71% of tenants are meeting the 27-day benchmark. In retail, just 58% of tenants entered Victoria’s fifth lockdown paying on time, and even that is better than payments in May or April. 

The data for the sixth lockdown, due to extend at least another month, promises to be far more grim.

The government’s response

The Victorian government has moved to soften the blow of these lockdowns on business, with the reintroduction of the Commercial Tenancy Relief Scheme

It’s designed to help businesses with an annual turnover of less than $50 million that have experienced a fall in turnover of more than 30%.

The scheme will operate until 15 January 2022, and requires landlords to make a written offer for rent relief within 14 days of receiving a request and supporting evidence from an eligible tenant.

That offer must be, at a minimum, in line with the downturn the business has experienced. 

A hairdresser that has lost 50% in turnover must be offered rent relief of at least 50% for the relief period, for example. A restaurant next door, with turnover down 30%, must be offered rent relief of 30% or more. 

At least half of that rent relief must be waived; a debt that will never be paid. 

The other proportion must be deferred until January 16, 2022, and then paid out over at least two years, or longer depending on the lease. 

What if the business already owes back rent from the last set of lockdowns? 

In that case, repayments being made on previous relief schemes are frozen and past deferred rent is bundled together with that being deferred now. 

There’s no doubt that most businesses in line for the scheme are doing it tough, but the impact on landlords will also be considerable. 

It’s entirely possible under the scheme that rent that should have been paid a year ago won’t be fully paid back until January 2024, a distant prospect for a landlord who must still pay rates, insurance, utilities, maintenance fees and interest. 

The landlord can’t ask a non-paying tenant to leave (for the next four months at least, and possibly longer) and nor can they seek additional security on the accruing rent debt. 

In the meantime, the latest round of the Commercial Landlord Hardship Fund, which provided up to $3,000 to some small eligible landlords for each tenancy where rent was waived, closed six months ago. 

A new landlord relief mechanism is supposed to be on the horizon – but it is not yet clear who that will cover, or how much a landlord might receive in return. 

Business carries the burden

It’s once again an example of how governments are socialising the cost of the pandemic by pushing the burden on to business. 

We saw it in May in the Victorian Government’s unexpected mental health levy, adding $3 billion to company payroll in order to fund investment in mental health services, which are under growing demand as the pandemic rolls on. 

In the case of rent relief, we are seeing property owners and landlords shoulder additional pain to improve the balance sheets of tenants. JobKeeper effectively used to serve that purpose; now it is the private sector. 

As a mechanism the rent relief scheme is also blunt, locking landlords into providing relief while not investing any government support in helping the business reposition, improve cashflow or curb other expenditure. 

A struggling tenant will always want to kick the can down the road on rent, crossing their fingers that things will eventually improve, so demand for rent relief will be high. 

But instead of simply providing a summary of lost turnover to be eligible, it might be more effective to make rent relief available only to those with a clear assessment of where their business is at. 

Is it really viable in this economy? What is likely to change in the next four months? How much will their debt accrue over this time, and are they actually able to sustain increased rental payments over the next two years? 

The tenant might still take the rent relief option, or they might cut their losses instead. 

At least with this approach, both tenant and landlord can discuss the impact of ongoing rent deferrals, and the likelihood the business will be able to step up to meet its obligations.

Given landlords are being asked to forgo income to help keep tenants running, that additional scrutiny seems the least the Victorian Government can do.

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