Victoria passing lockdown costs onto landlords

Legal experts say Victoria is socialising the pandemic and pushing its burdens onto business, with a new round of support for commercial tenants disproportionately relying on property investors and landlords to carry the financial costs of the state's latest lockdown.

Victorian Premier Daniel Andrews unveiled a suite of new regulations to support commercial tenants late last month, aimed at assisting small businesses with turnover of less than $50 million which have lost 30 per cent or more of their income due to the pandemic.

The scheme is similar to tenant protection measures established last year by the Victorian government, with a number of key changes.

Under the new Commercial Tenancies Relief Scheme, eligible tenants will receive rent reductions in proportion to their loss of income, meaning that a business that’s lost 40 per cent of its income, for example, will receive a 40 per cent reduction on their rent.

At least half of the rent reduction must be waived by the landlord, with the remainder to be deferred and payable over a two-year period. 

In return for the rent reductions, landlords can access land tax discounts of up to 25 per cent.

The Victorian government also unveiled a new iteration of its Commercial Landlord Hardship Fund, offering grants of up to $6,000 per tenancy, capped at $10,000, for property owners with a commercial portfolio worth less than $3 million.

Pitcher Partners executive director Craig Whatman said that $3 million limit would cut out the majority of commercial landlords, while details of the 25 per cent land tax reductions have yet to be released.

Mr Whatman said the limits to the program would likely result in landlords shouldering additional pain to improve the balance sheets of tenants.

“The problem is we have got landlords still dipping into their pockets to support the tenants, yet the relief coming their way is much slower to come out of the government, so it will be some time before that starts to flow through to the landlords,” Mr Whatman said.

“The experience with the first round in terms of the land tax relief was that it was quite slow in terms of the cash getting into the landlords’ pockets, so certainly we’ll be pushing hard for the government to release the next round of land tax relief as quickly as possible.

“We are still in the midst of applications for the first round of land tax relief that hasn’t yet hit the bank accounts of landlords, yet they have been supporting tenants for well over 12 months now in terms of that relief. 

“Some landlords have actually gone above and beyond in terms of the relief provided, they haven’t just met the minimum requirements, and some have provided relief in cases where the minimum requirements of the scheme haven’t actually been met by the tenants.

“We have got clients that have provided more relief than they were technically required to provide and that’s because they have a long-standing relationship with their tenants and they want to maintain that. 

“The government really needs to look beyond the bare minimum and recognise that some landlords have gone above and beyond in terms of the support that’s provided.”

Mr Whatman said rental valuations were looming as the next big challenge for commercial landlords to navigate, particularly in the Melbourne CBD and other areas that have been hit particularly hard by the pandemic.

“At the time when those rents are reviewed and rents are renegotiated, I think we are going to start seeing significant reductions in the actual rent that can be charged by landlords, so they are going to be hit with a double whammy in that respect," he said.

“They’ve got this waiver and deferral aspect under the scheme and they’ve got an upcoming dramatic decrease, in some cases, in terms of the rent they are going to be able to charge for a premises on an ongoing basis.” 

The duration of the scheme is also a big concern for landlords, Mr Whatman said, with tenants eligible to claim rental support up until January 15, 2022.

“Landlords could be carrying deferrals out until 2024, and that’s a significant time in the future, and whether the particular business that is the tenant is still sustainable coming out of COVID is a question that nobody knows the answer to at the moment because that’s not being assessed.  

“It’s really just based on the decline in turnover that they’ve suffered without giving any real thought or review of their current status and what they are likely to look like in 2022 and beyond. 

“There is a big time lag there that is going to catch up.”

Pitcher Partners executive director Andrew Clugston said another shortcoming of the scheme was that landlords would be compelled to provide rent relief, but banks and non-bank lenders would not be compelled to provide a similar level of support to the landlords.

“It will come down to landlords having to negotiate with their banks if they are having issues in servicing their debt, and you would hope the banks will be flexible, but there is nothing requiring them to be flexible there,” Mr Clugston said.

“Something we are encouraging our landlord clients to do is to get on the front foot with their banks and let them know if there is going to be significant rent relief provided then they need to be fairly proactive in managing that. 

“Certainly on residential property home loans, the bank can’t force a borrower to sell just because of an LVR issue, but on commercial loans that’s not necessarily the case, there can be LVR covenants and if the covenants are breached, then either they will need to chip in with more equity or sell the asset. 

“It’s not something we expect to see in the residential market, but in the commercial market it could be a real issue.”

On the positive side for landlords, Mr Clugston said a two-week time limit for tenants to provide financial reports to the property owners was certainly a welcome change from the first iteration of the scheme.

“In practice last year we found that tenants were very slow in providing and simply didn’t pay any rent at all until the offer for relief was made and accepted,” Mr Clugston said.

“That quite often meant that landlords received no rent for several months, even if in the end the tenant might have only been entitled to a 30 or 40 per cent rent relief, they just wouldn’t pay anything until the deal had been done. 

“So at least now with a 14-day time limit for tenants providing the information, I think that’s a really good initiative that helps landlords in freeing up their cash.”