One of the measures the government is taking to reduce the impact of coronavirus on the economy is rent reductions.
There is no law as such to impose rent reductions, but the government is encouraging landlord/tenants to voluntarily reduce rents by 30-50% for three months during this year.
In “exchange” the government will provide a discount in terms of taxation on the rental income which is approximately 50% of the discount given.
This is all well and good, for those who have a taxable income, but for those who do not, it is up to them to study the proposal with their accountant or advisors and decide accordingly.
Commercial properties, in particular, have lost a lot, for businesses we suggest landlords offer the reduction, especially if the tenants so far are good rental payers, bearing in mind also the rent payable, since a lot of rents (e.g. the statutory ones) are already well below the market rates.
Keeping the existing tenants happy is recommended since under the prevailing circumstances finding a good alternative tenant is far more difficult.
To seek the tax discount, the landlord/tenant must have a written agreement on this.
Landlords must bear in mind that related leases between companies that agree to a rental reduction, may not be acceptable to the tax authorities.
For this reason, we suggest that landlords should seek the advice of their auditors.
This “common understanding” on the rental reduction, should not apply to properties which are let to people, whose income is not affected, such as civil servants, insurance/bank employees or even pensioners who have not lost a cent.
For any tenant seeking a rent reduction, the tenant must be in a position to prove that his business has been affected by at least 25% from the previous year and to be in line with other subsidies provided to business by the government.
This discount should also exclude the reduction of business due to bad management by the tenants and we have many instances of bad management having reduced business, who are now asking for a rental reduction.
Avoid “deals under the table”:
- These businesses/tenants that seek a reduction must not have fired any staff for which they get heavy subsidies by the government – this to be in accord with the whole governmental philosophy on aid packages linked to the virus.
- Bear in mind that tenant eviction notwithstanding the reason, will not be effective by the courts before 9/2020.
- There is now an added confusion regarding who is a statutory tenant. Statutory tenants who are offered the protection of the rents control law, refer to buildings completed prior to 12/1999 and provided they fall within the rent-controlled areas (primarily the municipalities).
A recent Supreme Court decision stated that in addition to the above, the property must have been let or it was on offer to let on 12/1999. How does one prove this? So, regarding statutory tenants, we have another unique parameter.
- In another case where the property was let to a company with “good financially standing shareholders”, the shareholders changed and were replaced by shareholders with very weak financial standing who have a problem (to pay the rent). So, in such cases, the landlords should also record in their lease agreement that the shareholders should stay the same as originally agreed or at least any change of shareholders to be subject to the landlord’s approval.
In any case, and in the event of a lease to a company, we suggest that the main shareholders should personally guarantee the agreement.
One of the most knowledgeable and eminent businessmen of Cyprus Mr Evagoras Lanitis, once told me that “the best guarantor is the tenant’s wife”.
And all these complications came about because the government and our “wise” MPs wanted to meddle with the free market/economy.