Commercial

Commercial sector facing hundreds of millions in lost revenue

Some large commercial tenants are refusing to pay rent and this could devastate the commercial property sector, the Property Council New Zealand is warning.

Friday, March 27th 2020

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.

Comments

On Saturday, March 28th 2020 10:22 am Vaultdweller said:

Question: I am a small commercial landlord (husband and wife) working with my tenant (a 'mum & dad' owned motel operator) to lower rent to match their drop in revenue (down 90%). Have requested bank to support this by breaking fixed term loan @ 6% and lowering to something more reasonable, where they (bank) can still make some margin but we are provided relief. If this occurs, I can afford to slash rent with only moderate pain. If this does not occur, I'll need to demand full rent from motellier. Bank has responded saying we should take a mortgage holiday, i.e. they will keep charging full interest we'll just pay them later! This seems crazy and totally against the bank messaging of 'support' their customers. Has anyone had any luck in a similar situation. HELP! Thanks, V

On Saturday, March 28th 2020 11:28 am Denise Roose said:

Hi, Is the clause you commented on above the one in the 'standard ADLS sixth edition which includes a clause for No Access in Emergency ( clause 27.5 and 27.6 ).” ? What clause 27.5 - actually says is.... “than a fair proportion of the rent and outgoings shall cease to be payable”.... It doesn't say tenants do not have to pay rent although a lot of tenants are using this to stop paying rent.(not sure what the legal stance is on this) Tenants 'belongings, equipment' etc are still in the building so they are still using it for 'storage' during this time - obviously, in most cases, they have no income to pay the rent but landlords need the rent to pay their mortgages in many cases. One suggestion is that the landlord negotiates the rent rate with the tenant for this period and advises the tenant to seek assistance via Govt assistance, Insurance Brokers or their bank - just like Landlords shoud be doing. - Tough times ahead for all!

On Saturday, March 28th 2020 12:29 pm Propjourno said:

@Denise Roose - you are right re: the clause. We have now clarified this point in the article.

On Saturday, April 04th 2020 12:06 pm Commercial property managers said:

In a court of law, it may reasonably be argued that, as neither the Tenant or the Landlord is at fault under Lockdown a “Fair Portion” could only every be an “equal loss” each way (I.e.fair) rendering that the tenant should pay 50% rent & Opex and the landlord should forgo 50% rent & Opex. This is a legal interpretation we received and certainly the position we will seek if challenged.

On Tuesday, May 05th 2020 3:17 pm FarmerPete said:

The government has recently announced its intention to change the notice period required for breaches under commercial leases from 10 days to 30 days. We have a multi tenancy facility with two name national tenants, one of whom has decided to use this announced intention as man excuse to change his lease payments from a month in advance to a month in arrears. In effect he is saying because the landlord can only issue a breach after 30 days, he can pay on the 30th day nad never be evicted. This new ‘’rule’ has not been passed by parliament, so his rationale will fail, but I thought it represented an interesting unintended consequence if the government actually does regulate in this way.

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