Advice and Opinion

Landlords and tenants need to behave responsibly during Covid-19

Landlord Tenant

Most of South Africa’s largest landlords have taken a hit over the past two months alongside some of South Africa’s largest retailers, like Massmart, seeking rental relief. Whilst this serves as a cautionary tale, Paragon Lending Solutions believes that smaller property owners and tenants can take action to ride out the bumpy months ahead.

As the reality of job losses begins to take its toll, many tenants will face the reality of not being able to pay their rent. Landlords, meanwhile, will be looking hard at their cash flow projections and wondering how they will meet repayments to banks and other lenders. Based on what we are seeing in the markets now, we have some advice for both property owners and their tenants,” says Gary Palmer, CEO of Paragon Lending Solutions.

Landlords – think long-term

Landlords need to think about how they can keep a good working, valuable relationship between owner and tenant, especially when times are tough.

Landlords have a few options that they can turn to which could offer real benefits to their tenants:

  1. Write-offs. Paragon has numerous clients who are either writing off the full rental for one or two months or, who are allowing their tenants to pay 50% of the rental for a few months. These losses are then reported in their tax returns.
  2. Payment holidays – the most often referenced assistance. Most landlords are opting to take this route if a tenant asks for assistance. Property owners are capitalizing on the payment holiday (usually around three months’ worth) into the lease. If you follow this route, it is best to include an addendum into the lease which stipulates the details of the agreement. This could be an extension on the lease period or, a payback period to catch up on the skipped payments.
  3. Passing on interest savings. Some property owners are passing on the savings they have seen because of the interest rate cuts. Although not a huge amount, this small saving will be appreciated by tenants and it could serve the landlord well in future negotiations and dealings with their tenants.
  4. Use the deposit. Allow your tenants to access their deposit money if they cannot pay rent for a couple of months. This will allow them to ‘take the break’ with the understanding that they will forfeit the money from their deposit when they vacate your premises. This agreement should be recorded in an addendum in the lease contract to cover both parties.

Tenants must play it straight

Both commercial and private tenants may feel completely helpless. If they proceed with caution, there are some simple steps that they could take to protect their futures:

  1. The long game counts. Commercial tenants need to take a long-term view on how they behave during the next few months – how they act now will impact how they are treated by lenders in the future. ‘Delinquent’ clients who refuse to take calls or to communicate with lenders will be viewed as unfavorable in the future.
  2. Consider all your options. There are a few ways in which tenants can access relief from their landlord. It is important to know what the impact of each of these options will be. For example, simply jumping at a payment holiday may come with some very unattractive long-term consequences. Interest will be accrued, and you could end up with a nasty surprise in a year’s time. Do the math before signing anything.
  3. Clear communication. Do not panic. It is important to focus on what you can do presently. If you are in trouble, apply for a payment holiday with your bank if you think it is the right thing to do. Contact your creditors and tell them about your predicament. Communicate and manage expectations.
  4. Get your house in order. Tenants cannot assume that they will be automatically granted payment breaks. You should have all the necessary documentation at hand when approaching your landlord. For small business owners, Paragon recommends that you produce your management accounts, your bank statements and lay out your reasons for requesting a payment break. It may be worth doing a credit check on yourself to show your credit history of good payment behaviour.

Transparency and responsibility

The overriding message for both tenant and landlord is to behave responsibly.

Unfortunately, we sometimes see that there is not a lot of transparency in how either party is behaving. Landlords are often given payment holidays by their banks but are then not extending these to their tenants”.

Tenants, on the other hand are simply refusing to pay the whole rental amount, including their utilities. This can really hurt property owners, some of whom still have to pay the utility fees to municipalities, leaving them significantly out of pocket. The best way forward is to play nicely, and do what’s best for your longer-term business relationships,” Palmer concludes.