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Covid-19: Temporary rent reduction

Thursday, March 19, 2020

Strange times have the tendency of throwing up unexpected challenges and these are certainly strange times.

We are only starting to feel the effects of the coronavirus pandemic. As to how the next few weeks or even months will unfold, it is simply too early to tell.

 

For the time being, we encourage landlords to take stock in order to have a good understanding of your various rental income streams. Some will be more at risk than others. For example, incomes from government-backed/social housing tenancies are less likely to be disrupted than incomes from private renters working in the hospitality industry. Having this awareness at the early stage of a likely slowdown puts you in a strong position to mitigate your cash-flow risks. As many seasoned investors who have gone through previous economic crises would tell you, in times like these, cash-flow is well and truly king.
 
Some sensible things to do at this stage include
  • Check and confirm your loss of rent coverage;
  • Speak to your bank or broker to arrange for a flexi facility;
  • Get a preliminary understanding of what it would take to go from a P&I loan to an interest-only loan;
  • Open up a dialogue with your tenant and encourage them to front-foot any potential cash-flow issues/pain points with you (instead of burying their heads in the sand);
  • Get on top of addressing existing arrears if you haven’t already; and
  • Be open to either granting a temporary rent reduction or an alternative rental payment schedule to give your tenant some relief.
To be clear, a temporary rent reduction or alternative payment schedule is not suitable for everyone. In no way are we putting these options forward as a recommendation for all landlords. In saying that, we are aware that under the right circumstances a rent reduction or an alternative payment schedule could yield a win-win result for landlords and tenants long-term. If you are prepared to explore these ideas further, here are a few bits and bobs to be aware of.

An alternative payment schedule

An alternative payment schedule in this instance would involve the landlord essentially granting the tenant more time to make rent payments in full. This can take several forms. For example, say rent is due every Wednesday, you could come to an arrangement where over the next three months, rents fall due in full on the last Wednesday of each month. Or you could agree to receiving only 50% of the rent every Wednesday for the next three months with the remaining 50% being repaid in full by the following three months as an equal weekly payment added on top of the normal rent (i.e. from months four to six the tenants pays 1.5x the usual rent).

 

A temporary rent reduction

A temporary rent reduction is different from an alternative payment schedule in the sense that you are essentially forgiving part of the rent and waiving your right to recover the deducted amount at a later date. For example, you could grant a temporary rent reduction to 50% of the rent for the next three months. The tenant will pay half rent for three months after the term expires, the tenant will revert to paying full rent. The 50% of the rent you have ‘lost out on’ over the three months will not be recoverable.

Should you proceed with either option, we recommend that you record the arrangement in writing (preferably as a variation to the tenancy agreement) signed by both parties. Set down clear and specific terms. If it makes life easier, lay out in a table format all the projected payment dates and the amounts to be paid. In the case of a temporary rent reduction, you will have to follow the terms of s24A which basically requires the variation to be in writing, signed by both parties and delivered to the tenant before the variation would take effect. S24A confirmed that on expiry the original rent is reinstated and the reinstatement does not count as an increase (which would otherwise affect your ability to increase rent at a later date). In the case of an alternative payment schedule, be clear that should the tenancy come to an and end before the final payback date then all outstanding/delayed payments are to be made in full.

In weighing up the appropriateness of a rent reduction or an alternative payment schedule, take a case-by-case approach. Consider the length of the tenancy, the quality of the relationship, the skill-set of the tenant, the circumstances of their cash-flow pressure, the nature of the industry they work in, your risk appetite and your personal cash-flow challenges. There is no one size fit all solution. Residential tenancy is, after all, people doing business with people. 

We hope everyone is staying safe and keeping positive. Though the times ahead could be tough, we would all be well served to stay calm, act deliberately and be kind to one another.

 

 

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