Commercial sector facing hundreds of millions in lost revenue
Friday 27 March 2020
Some large commercial tenants are refusing to pay rent and this could devastate the commercial property sector, the Property Council New Zealand is warning.
By The Landlord
The Property Council is calling for property owners, tenants and the Government to act quickly to support the sector, which is facing hundreds of millions in lost revenue, increasing the risk of stalling the economy.
Property Council chief executive Leonie Freeman says they are hearing of a multitude of scenarios regarding rental payments.
“At one end of the spectrum there are many landlords working constructively with tenants on their particular situations and discussing rent relief such as postponement or other relief measures.
“However, there are many examples of large tenants sending letters announcing they are refusing to pay rent with no consultation. This move could devastate the commercial, industrial and retail property sectors.”
The situation is made more uncertain by a specific lease clause, introduced in the wake of the Christchurch earthquakes, which stipulates that a fair proportion of the rent and outgoings shall cease to be payable if the tenant doesn’t have access to the premises.
But it seems that for some tenants this has been taken to mean that tenants do not have to pay rent at all if they don’t have access to the premises.
Freeman says it’s impossible to know how many contracts include this particular clause, but they expect the impact for property owners to be in the hundreds of millions.
While the Government recently announced the reintroduction of depreciation on commercial buildings as part of its Covid-19 economic support package, which is a positive move, it’s not enough, she says.
“It is not an immediate cash injection and therefore does not solve the immediate situation of supporting those landlords and tenants needing assistance during this lockdown period.
“In addition, the level to which depreciation on buildings improves a landlord’s position varies significantly depending on the tax profile of the landlord and the type of building, where retail properties in particular benefit to a significantly lesser extent than other property classes.
“It is simply not enough to bridge the gap in what is becoming a crisis of cashflow for many property owners.”
For these reasons, the Property Council is asking for the Government to work with commercial landlords and tenants to find some rent relief solutions.
There are a variety of potential solutions that would alleviate the economic impact of COVID-19, but action must come from the top and it must be put in place quickly, Freeman says.
“Support for property owners and tenants could be a targeted subsidy or another form of support package. The next three months will be critical to keeping the economy moving.
“On a local level, our members have also asked that local government look at rates relief and re-consider their proposed rates increases during the upcoming annual plan process.”
Freeman says the ramifications of letting property owners bear the brunt of this crisis are dire as there’s little point in having a tenant survive with the landlord foreclosed on and vice versa.
“We must work together to get through this period of unpredictability.”
The Property Council is encouraging landlords to review their current agreements, consult with their lawyers on the implications, check their insurance and have an honest conversation with their tenants about the best way forward.
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