COVID-19 - What About The Rent?

While it has been anything but business as usual for us this week, we have certainly been kept busy in respect of this question. When the Alert Level 4 announcement was made on Monday, this was quickly followed by a flood of phone calls and emails from landlords and lessees asking for advice or information. Initially we were as perplexed as anyone else in trying to establish the way forward, so have spent the week speaking to motel operators, landlords, lawyers and banks.

As would be expected, there were some who took an extreme position, however it seems that the majority are taking a reasonable and sensible approach to the situation. Some landlords are in denial, not considering the crisis to be their problem, just that of the lessee. Thankfully not many, but some insisting that the full rental must be paid, and others turning a deaf ear and not responding to requests for dialogue on the subject. Equally some leaseholders appear to be of view that if they have no income, then surely they can’t be expected to pay rent. In other words, this is entirely the landlord’s problem.

It would seem reasonably clear that the lease still requires payment of the rent but speaking to lawyers this is potentially a complex legal situation. Arguments could arise around No Access Provisions (although such clauses are not in many motel leases), Frustrated Contracts Act (a lease is essentially a contract) or Force Majeure clauses. Professional legal advice should always be sought on a case-by-case basis, however probably safe to say that it should not be assumed that the full rental is not due and payable. It remains likely that the failure to pay the full rental, (other than by mutual agreement), would be a breach of the lease.

These days we are hearing “We are all in this together”. Perhaps this should be kept in mind when considering where the burden falls. Thankfully, of the many people we have spoken to this week, most have acted swiftly to come to an arrangement. Some landlords have been more generous than others and we have seen a variety of temporary agreements. These include:

Rent reduced by 50% for several months – the discount being seen as a waiver which need not be repaid. In several instances this agreement was made on the basis that the 50% of the rent would be paid on time, otherwise the deal would no longer stand and the full rental would be due, with any shortfall being seen as rental arrears.
Rent reduced by 50% for several months, or as long as necessary, however seen as a deferral which would still need to be repaid in the future. Basically an interest free loan.
Full rental for the next month (based on normal revenue being received up until recently) then a reduction by 50% as a waiver for a number of months.
A management company looking after six properties reported discounts for the next month would be between 25% and 50% (depending on the location of the property), followed by 50% discount for May and June, then reviewed.
Wait and see. One comment was that things are changing so quickly, that there is no point in making any alternative arrangements earlier than necessary. This landlord was contemplating waiving the rental for one month, then discounting by 50%, however on a deferral basis which would need to be repaid.
The Managing Director of one of New Zealand’s large motel franchises advised that they had been proactive in approaching landlords and had achieved a 50% rental waiver for the next two months, followed then by a review of the situation. This was successfully achieved with almost every landlord. The business development manager for the group was to focus proactively on exploring markets for those essential services situations, which of course include isolation/quarantine, essential service workers and emergency housing. The sales and business development franchise fees were to be deferred for now.
One very lucky motelier’s landlord asked them to pay the next month’s rent in full, then after that please pay $2000 per month plus GST as “we can live on that”. Another rare gesture of generosity from a landlord was, no rent for the next three months and the landlord would also pay the monthly insurance premiums. It is heart-warming to hear these anecdotes.

BANKS

Speaking to two senior bankers on Wednesday, we are informed that the final details of the government’s Business Loan Guarantee Scheme were still being worked through. What has been reported so far is that the government intends to guarantee 80% of such loans, so that in the event of default the bank would only stand to lose up to 20% of the principal. The idea being that such loans would be mostly used as bridging loans to pay rent, suppliers and other operating expenses. This may be a lifeline for a number of lessees, so if you have not already it could pay to talk to your bank.

One bank had been proactive in contacting their clients to offer assistance if needed. We understand the bank’s action in taking the initiative in this respect was gratefully received. The offers made by banks seem to be a principal holiday with interest only payable, or a complete mortgage holiday with no payments. Bear in mind that the latter will still require payment of interest in due course, usually the unpaid interest will be added to the principal sum owing.

We are informed that the banks would still be happy to consider new lending for a strong proposal.

ESSENTIAL SERVICES

We understand that motels providing accommodation for essential services workers, self-isolation/quarantine guests and emergency housing are included in those businesses allowed to remain open. Most motel operators live on-site, so seemingly are not required to vacate the business premises. It is likely therefore that any guests that may be staying would probably include those that fall into the above-mentioned categories.

Our recent sales include three businesses which were to settle on 31 March. One has been postponed until later in the year, however we understand that the other two will settle and change hands on Tuesday. This is mentioned because residential properties are mostly not able to settle. Whilst it is possible that purchaser could make the payment on settlement date, the vendor is often not likely to be able to move out and provide vacant possession. We are informed that the two motel sales are still able to proceed, with the parties being able to move in and out of the property, due to the business providing such essential services.

THE MARKET

Not surprisingly, our market activity has been very low since Monday’s announcement. We have had some enquiries looking for bargains, however when we experience such market upheavals, such as the GFC in 2008, there is usually a delay before any market adjustments are evident. We have to wait and see where this goes.

We have seen a number of transactions cancelled due to uncertainty, however others have been put on hold. We currently have two contracts pending with an institutional investor buying land and buildings. Rather than cancel the contracts, they are seeking an extension of time for due diligence to a date beyond the lockdown period.

DISCLAIMER

The contents of this article are not to be construed as legal or technical advice. As always parties should always seek independent professional advice on such matters.

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