Shock as Govt offers no rent relief for SMEs

The Government’s latest business support package has failed to help small businesses with big rents to pay and little or no income. Commentators predict many won’t survive. Nikki Mandow reports

It was the announcement small retail, hospitality and other businesses - and their landlords - had been waiting for. A decision on what financial support the Government would offer SMEs struggling to pay rent when they have no customers, and/or landlords struggling to pay the mortgage when they have no rent coming in.

The Government had promised to cushion the blow from level 4 lockdown, and the wage subsidy was helping with one major business expense: salaries. Now businesses hoped for some relief for their second major financial burden: rent.

They didn’t get it.

The package, announced on Wednesday morning by Ministers Grant Robertson (Finance), Andrew Little (Justice) and Stuart Nash (Small Business) extended the amount of time a tenant can be in arrears before their landlord can throw them out from 10 working days to 30. 

And it extended the time a landlord can not pay the mortgage before the bank can pull the plug - from 20 to 40 working days for mortgaged land and 10 to 20 working days for mortgaged goods.

Which is of course a good thing - it buys tenants and landlords a bit of time.

But what both sides really need now is cashflow.

Everyone Newsroom spoke to about the announcement was disappointed. Some were devastated.

Property Council CEO Leonie Freeman thinks the Government has made the wrong decision. Photo: Supplied.

Leonie Freeman is chief executive of the Property Council. Over the weeks of the lockdown, her staff have fielded huge numbers of calls from landlords and tenants who have no idea how they are going to keep their businesses going.

“There’s a huge amount of stress on both sides. Take someone who owns a cafe and whose business is shut because of the lockdown. They can’t pay the rent and they want help from their landlord, but he is a small landlord and has a mortgage to pay and gets no relief around mortgage payments.

Everyone’s been waiting for this announcement - hoping the Government would help.

“Many times both the landlord and the tenant are trying to do the right thing, but everyone is stressed to the max."

Freeman says she’s had plenty of people in tears on the phone - from both sides.

“Everyone’s been waiting for this announcement - hoping the Government would help.”

She can’t understand why the ministers haven’t made some money available.

“I just don’t know. I’m worried a lot of businesses, particularly small businesses are not going to be able to keep going if they don’t have help with the rent. The Government has done a good job with wage subsidies, but that’s meaningless if the businesses can’t survive the next 6-12 months.”

Freeman says the Property Council has been in discussions with Government and had come up with a number of proposals it believed would help commercial tenants facing a 50 percent loss of revenue - or more.

These included a deferral of rent by landlords, facilitated by the tax system, and a targeted rent tax credit for tenants, “with direct financial assistance via a mechanism similar to the Government’s wage subsidy”.

It’s the same message with everyone Newsroom contacted.

Why no help?

Tenby Powell, Mayor of Tauranga and chairman of the Government's own Small Business Council, said the question shouldn’t be whether the Government provided rent relief, but whether it was paid to landlords, who then compensated their tenants, or to tenants, who used it to pay their rent.

“Any way of reducing fixed costs is good and that’s a burden the Government should consider. Even if it’s just in the short to medium term, because the effects we are feeling now are going to be amplified in six months.”

Many South Island businesses are really struggling, Dougal McGowan says.

Dougal McGowan, head of the Otago Chamber of Commerce says the problems for SMEs will be exacerbated in regions like his, where income is so seasonal. 

“In March even before the lockdown, hospitality revenues were down 30 percent because of Covid-19. And severe flooding in parts of the South Island in late 2019 and early this year made things worse - keeping tourists out of (or sometimes trapping them in) normally busy areas. 

“Many businesses haven’t had the cash injection they normally get in the peak period to see them through the winter,” McGowan says. “Many are really struggling, to be sure.”

A complicated situation

One of the problems for Government in coming up with an offer for tenants, is that there are so many different scenarios. At one end, supermarkets will be raking in the dollars, and won’t need any rent subsidy, and in the middle there will be some businesses - lawyers, accountants, IT consultants - where they might be able to maintain a good amount of income working from home.

Cafes will have no income during the lockdown, but they will still have rent to pay. Photo: Lynn Grieveson.

But a cafe, a boutique hotel, or a small high street retailer - none of them will have any money coming in during the level 4 lockdown and probably beyond.

Even if some of that rent is deferred, it’s still a liability, and I will reach a point when I will have to say ‘I simply can’t do this’.

“I’m not asking for a free ride,” the owner of a small retail chain told Newsroom. “But I have no income now. I’m closed and my outgoings are close to $600,000 a month, even after the wage subsidy. And 400,000 of that is rent and operating expenses. 

“Even if some of that rent is deferred, it’s still a liability, and I will reach a point when I will have to say ‘I simply can’t do this’. 

“If I remain in a state of uncertainty I’ll have to pull the plug.”

The only way through it, he says, is for tenants, landlords and the Government to share the pain.

Missing the point

A few hours after the announcement, Retailer NZ chief executive Greg Harford was still puzzling over why the Government made the decision it did. 

In theory it’s good landlords can’t throw tenants out, but in practice few are likely to do so anyway. In the present economic climate, who else would they get to fill their empty space? Better to come to an arrangement that hopefully keeps both alive.

Retail NZ's Greg Harford says many landlords won't want to evict tenants who don't pay rent during the lockdown. Photo: Lynn Grieveson.

But that’s more likely with government assistance.

“The bigger issue is around relief from rent and outgoings, which in some cases are substantial,” Harford says.

“We need to see clear direction from Government that rent relief should be applied, and the Government needs to come to the party in terms of some sort of financial support help."

What the Australians have done

Why didn’t the Government come to the party with more guidance for commercial landlords and tenants, and more importantly, some money?

The Australians, while not providing the latter, have at least done the former. 

The Government there has introduced a new mandatory tenancy code for commercial landlords in Australia, which applies to tenancies where the tenant or landlord has a turnover of A$50 million or less.  

Under the code:

- Landlords must not terminate the lease or draw on a tenant’s security. 

- They will be required to reduce rent in proportion to the trading reduction in the tenant’s business through a combination of waivers of rent and deferrals of rent. Waivers must account for at least 50 per cent of the reduction in the rent provided to the tenant during the crisis period.  Deferrals must be amortised over the balance of the lease or for a period of no less than 24 months, whichever is greater. 

- Tenants must honour the lease. Material failure to abide by substantive terms of the lease will forfeit any protections the code offers.

The Australian Government is also waiving rents for SME and not-for-profit tenants within its owned and leased property across Australia.

Auckland barrister Antony Holmes, says clarification would help in New Zealand too.

"The announcements this morning did not provide the expected level of relief or guidance for either commercial landlords or tenants," he says. "Although some leases allow for rent reductions when there is “no access”, this does not apply in all cases and may not adequately address scenarios moving forward where we may move in and out of level 4 lockdown. 

"Looking ahead, there would be a clear benefit from greater prescription, providing some form of rent reduction for tenants, hand-in-hand with interest relief for landlords. If not, the current willingness to negotiate may start to evaporate once commercial pressures really start to mount.   

"Further assistance will be needed in this area to reduce risk of either landlord or tenant insolvency, and commercial landlords calling upon personal guarantees."

Government answers

Newsroom couldn’t get a feel for why the Government has done what it has done, but it did get some answers from Andrew Little’s office.

Andrew Little says this is a significant announcement. Others aren't so sure. Photo: Lynn Grieveson.

No, more announcements weren’t likely in the near future: “This is a significant announcement for commercial landlords and tenants”.

No, a mandated rent freeze wasn’t likely because rent levels weren't covered by the Property Law Act 2007 and therefore they couldn't be changed. (Though to be honest, what landlord is going to try to put rents up in the present climate - they will be lucky to get the present rent.)

And no, a compulsory duty for landlords and tenants to negotiate around commercial rents for the lockdown and extended restricted period wasn’t necessary.

“By extending the time parties have to deal with tenancy breaches it is more likely they will be able to assess the reality of the current situation and negotiate something that suits the situation,” Little says.

“Everybody is having to contribute something towards the post-lockdown recovery and so distressed tenants and landlords will need to talk and will need to be realistic if we want everyone to have a chance to resume stalled economic activity as quickly as possible.”

Michael Barnett says the cost of doing nothing about rents will be extremely high for SMEs. Photo: Alexia Russell. 

Let’s hope he’s right,, says Michael Barnett, chief executive of the Auckland Chamber of Commerce. Barnett called the announcement “unfortunate” and said he was shocked when he heard.

I don’t know if the problem is just too hard, but the cost is going to be extremely high for these businesses. 

“If I look at hierarchy of pain for small businesses, the first is around paying employees. The Government stepped in. 

“The next point of pain is their rental agreement. You can’t expect the Government to guarantee anything, but this is an area where they could have influence, so decisions were made that were good for everyone.”

Barnett says he’s spent time talking through the issues with ministers and can’t understand why they came to the decision they did.

“I don’t know if the problem is just too hard, but the cost is going to be extremely high for these businesses. 

“There will be those that will just walk away.”

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