As we battle our way through COVD-19, we are seeing a lot of COVID rent decrease requests. Many Australians being laid off work, with the number expected to peak at 1.4 million come June. We are seeing many Australian families unable to meet their rental payments. Naturally, we are getting enquiries as to how to handle this from agencies. When approached about a rental decrease form your tenants, here are some checks to consider and information to guide you through.
When You Receive a COVID Rent Decrease Request
Legitimate Change in Circumstances
There must be a legitimate change in the circumstances of the tenant. This is not merely an excuse to party with a decrease in rental fees. In order to determine what is a legitimate change in circumstances, refer back to their initial rental agreement when the tenant first entered the Property. What job did they have at the time? Have their circumstances changed? Yet have they changed due to COVID or other reasons? Can they provide this evidence? It is important to note the decrease in rent must be as a direct result of COVID-19, not any other reason. Some agencies have gone a tad far such as this one in Victoria, asking for what was seen as quite intrusive personal information. A letter of termination from their employer or some other financial evidence that their income has changed will suffice.
As a result of COVID, the Government announced a 6-month revision moratorium for commercial and residential renters that are under financial distress. This will be legislated in each individual State and Territory as per their tenancy legislation.
If negotiating a rent decrease, it is important Property Managers don’t enter into an agreement with a tenant that will adversely affect the Owners by voiding their insurance. Look at the COVID-19 statement available on the insurer’s website and seek legal advice. Major insurance companies such as EBM and Terri Scheer are popular choices.
Deferred Mortgage Repayments for Owners
A rent decrease request may consequently put an Owner into financial distress themselves. Owners who require assistance due to a rent decrease request may be eligible for deferred mortgage payments. They should refer to their Lender to see what options are available.
The Silver Lining
We’d also like to note that it is not all gloom and doom on the rental front. We received a letter from one of our Client’s Owners as below:
“I hope this email finds you well.
Almost everyone I know has or is about to be impacted by COVID-19. My wife’s business was on track for its first year of making a profit and now all that is gone and she will be lucky to get through the next 3 months now. Fortunately, I have job security in my profession so we will get through this. Unfortunately, many people aren’t as fortunate.
I’ve seen some incredible acts of kindness from people in recent weeks so I would like to do something for our tenants.
I’m unsure of Luke and Sarah’s profession and I have no idea if they may be struggling or not. However, I’d like to offer them a week’s free rent. If they are struggling, then hopefully this will help. If they are not, then maybe they can pass on the savings in rent to someone close to them that really needs it.
Rosy and I have never had an investment property before this one, but we couldn’t be happier with our tenants.
If you are happy to manage the accounting side of this, it would be appreciated. Re the management fee, please maintain this as per normal arrangements (to ensure that ABC Realty isn’t negatively impacted by the reduced rent)”
*NAMES HAVE BEEN CHANGED*
Software Implications of a COVID Rental Decrease Request
There are a few points to be mindful of when working with a COVID rental decrease request.
The agency will not accrue the normal management fees if a tenant is paying a reduced rent. The agent will need to communicate with the Owners regarding the management fees. Do they adapt them or leave them as is? Most agents will choose to collect their management fee on rent received, as opposed to charging the owner on the full amount due.
If you are dealing with a short term reduction (ie: up to 4 weeks) then a rent credit is a good alternate option. However, rent credits do not generate management fees in the software. Rent credits are a good short term solution as you don’t need to change the cycle of the rent permanently in the software.
Indefinite Rent Reduction
If rent is being reduced for an indefinite time, use your software provider’s task/reminders to remind you that follow up is due at a later date.
Before advising a tenant of the date of the rent reduction, check the tenant’s ledger. If the tenant has a part paid, then the reduction can start on the next payment cycle date. For example, rent is $1,000 per fortnight, with $400 part paid. The tenant’s rent reduction can start 2 weeks from the current paid to date.
Follow the Same Rental Cycle
Ensure the reduction falls in line with the tenant’s normal cycle (weekly/fortnightly/monthly). This will help to avoid messy ledgers which will create confusion for both Owner and Tenant down the track. For example, if the tenant’s cycle is $1,000 every Friday fortnight, and the rent decrease is agreed upon on a Wednesday, start the reduction from the Friday where the rent is next due.
Jane Morgan is the Director of End of Month Angels, a consultancy firm specialising in Trust Accounting. Jane knows the legislative requirements of running a successful Real Estate office through her 23 years’ industry experience. Don’t trust just anyone with your trust accounting. Book an appointment with an End of Month Angel today.