Red flags raised on Victorian rent relief

Concerns are mounting that new Victorian legislation around commercial rents is placing disproportionate pressure on landlords to carry the burden of COVID-19-induced reductions in trade, with a prescribed 14 day period to analyse tenants’ financial positions likely too short to determine what would be appropriate relief.

The Victorian Small Business Commission released new regulations around rent relief for commercial tenants facing novel coronavirus-induced financial hardship last week, with a key component of the new rules a 14-day deadline to determine what support a landlord can provide.

The legislation builds on the mandatory code of conduct for commercial tenancies unveiled around a month ago at National Cabinet level, which requires landlords to provide rent relief in proportion to a tenant’s reduction in trade.

Pitcher Partners executive director Andrew Clugston said while the new Victorian legislation was largely positive, he was nonetheless concerned that landlords were being left to do the heavy lifting.

Mr Clugston said while the rules allowed landlords discretion to determine what level of rent relief would be appropriate, two weeks’ time is simply not enough to make an accurate assessment.

“If you are trying to extract information from a tenant who may not provide much in the way of cash flow budgets or financials, it puts landlords under a whole lot of pressure to comply with the regulations,” Mr Clugston told Australian Property Investor Magazine.

“If they are getting dozens and dozens of requests from all of their tenants, to turn them all around in a 14-day timeframe is going to be fairly difficult.

“It’s almost a case of ‘be careful of what you wish for’ for the landlords.

"They’ve got what they wanted in terms of broader discretion in offering rent relief, but a really strict time frame, so we’re trying to work with a lot of our landlord clients to help them get through that process quickly so they are not breaching the regulations and we’re getting a fair bit of resistance from tenants to actually provide the financial data.”

Mr Clugston said many landlords would not have the accounting or business analysis expertise in-house, and would have to bear the cost of engaging external firms to make financial assessments.

“It is passing a lot of work onto landlords who aren’t experienced in this area. The only threshold is it applies to businesses with aggregated turnover below $50 million,” he said.

“So it cuts out all the big players, but there are a lot of businesses in the economy with turnover under $50 million, most businesses fall into that category, and most, no matter how little they’ve been impacted, most are putting their hand out for rent relief."

Mr Clugston said another limitation of the new rules was the legislation appeared to require landlords to provide the same level of rent relief for the entire six month period to the end of September.

“We are seeking clarification on that,” Mr Clugston said.

“At the moment they are saying it relates to the six month period, what we are suggesting is that we might have to enter into some sort of variable rent relief that’s based on the profit each month, but we haven’t confirmed that. 

“It certainly doesn’t read that way in the legislation, it sounds like you do need to commit to a six-month period. 

“And when you have to make a decision in two weeks, it creates a lot of complexities for landlords who themselves aren’t the beneficiaries of much support at all. 

“In Victoria they are eligible for a minor land tax saving of 25 per cent, but they have to pass that onto the tenant anyway.”

Mr Clugston said a major worry for landlords was that any reduction in rental income would create difficulties in meeting banking covenants, affecting interest cover ratios and debt-servicing ability.

“If you have a significant retail asset with a whole lot of retailers that have shut down, then you’re really got to be reaching an agreement with your bank first before you offer relief to your tenants, because you can’t offer that to your tenants and find that you’re putting yourself into financial distress,” he said.

“You’ve got to get an overall picture of your property portfolio and which tenants will require relief and which won’t, because you’re really assessing it on an overall perspective, and then go into the bank once you’ve done that and seek confirmation from them. 

“It’s going to be tough, time wise, it’s going to be really tough to get this all done in 14 days.”