Residential tenancy response to COVID – what model should we use?
The Federal and State Governments have been delaying a COVID-19 decision for residential tenancy since the major economic policies were announced in March. An overall plan is needed to address the large number of residential tenants who are approaching their landlords and requesting a rental reduction as a consequence of reduced salaries or income. On 23rd March, the Prime Minister intimated that there would be an announcement in a few days’ time, but to this point, the only decision made was the pronouncement that residential tenants could not be evicted for non-payment of rent. Clearly, the extended delay is due to the complexity of the situation. What model should they be creating and what will the major details look like?
Commercial Tenancy has been addressed and, in my view, they have come up with a reasonable solution. Firstly, the view is that landlords and tenants could sort something out between themselves. Business people are negotiators and there are not many variables for either party. Landlords need tenants and tenants need premises, change is expensive and money is the only issue. In early April, a model was announced to insert some formal structure into the negotiations. A Job Keeper business (30% plus decrease in income) could expect a rent reduction of the same degree as the decrease in business income. This is fair as they are, very much, both in the same boat. For example, the owner of a premise that is located, constructed and fitted-out as a restaurant can’t expect the same rent as before, now that it’s only suitable for serving a few takeaway coffees. Commercial rental value is tied closely to the capacity of the tenant to produce income. It’s sad for both the landlord and tenant who are bound to each other by a beauty parlour, rather than a pharmacy, but that’s the unforeseen world we are in. That’s business.
Does Residential Tenancy have a similar solution? Unfortunately, no. In this this case, the landlord is offering shelter and the change in the tenants’ capacity to pay rent doesn’t alter the worth of that. The value that the landlord is offering is unchanged, except for two relatively minor factors that are relevant. The first is amenity. This is what is delivered in the property in addition to basic shelter. Loss of amenity should be addressed by a rental reduction. A good example is the availability of a pool or gymnasium in a strata-building. The use of these facilities is now prohibited, so the tenant should be entitled to receive a modest rental reduction. The second is the current market rent. After a lease expires, both tenants and landlords commonly seek to adjust the rent according to the market (defined as other equivalent properties that are currently, or recently, available for rental). Over the past two years, the market has fallen in many suburbs in Sydney, primarily due to an over-supply of new apartments. Tenants have been requesting and receiving rental reductions. It’s expected that rents will now fall even further as there is a hiatus of immigration, households will consolidate and incomes will decline for many. Fortuitously for many landlords, their interest costs have also been reducing. In summary, for these reasons most landlords should now be comfortable with a modest reduction in rent. What about the major reductions that are being requested by anxious tenants?
A good place to start for some structure is Abraham Maslow’s Hierarchy of Needs. The first Level of Need is Physiological – air, water, food, shelter, clothing, warmth and sleep. It’s reasonable for tenants to align their budget in that order. If we look at the JobSeeker benefit of $550 per week and JobKeeper benefit of $750 per week, after allowing say $140 per week per person for food, there is a reasonable amount left for rent and electricity. If there are two tenants, this is doubled. Perhaps a mobile phone is a new member of the first level of Needs, but what else qualifies as high as food, water and shelter? For most of these tenants then, in my view, there is an adequate capacity to pay a good percentage of their existing rent. Families situations are more complex.
There are many members of our society who don’t qualify for financial support, even though they are experiencing severe income loss. These include many casual employees, non-Job Keeper employees with reduced working hours, working-visa holders and others. Is it right that many unlucky landlords now become the providers of social security to these people? Coincidentally, there are also lucky landlords with tenants who have secure employment and pay full rent, benefit from record-low interest rates, land tax waivers etc and so are now better off than before the crisis.
It would be true to say that most landlords are concerned and want to do the right thing. Feeling under pressure from their tenant for a swift response, any offered rent reduction will invariably be either undeserved, too generous or too stingy. How good is that? The diverse group of owners range from compassionate to uncompromising and well-off to highly dependent on their rental income.
Real estate agents are now asking to see evidence of job loss, eligibility for Seeker or Keeper benefits and more controversially, bank statements. Theoretically, should the tenant who has been saving for a home deposit be expected the spend the $50,000 in their bank account before expecting a rent reduction? Should real estate agents and landlords be the arbiter of a tenant’s capacity to pay rent and question their financial priorities? Don’t even go near the suggestion of drawing down their superannuation. Can they be possibly guilty of providing financial advice? Should rent be waived or is a payment plan more suitable, where rent payments are deferred but still payable? Difficult questions.
Any model that comprehensively delivers fairness for both tenants and landlords will be complex. There are so many variations that an attempt to get it perfect will be unworkable.
In my view, the model should include:
- Where a tenant can demonstrate a significant decline in income, landlords should be required to reduce rent by 5% to 10%, to reflect loss of amenity and the downturn in rental values. Reductions above this amount should be the exception.
- The Job Seeker and Job Keeper benefits should, by default, provide enough income for most tenant households.
- Where a tenant is unable to access Job Seeker or Job Keeper benefits, the Government should provide direct rental assistance.
- Tenants should be obliged to give accurate details of their new financial circumstances to landlords or tribunal when requesting a rent reduction greater than 10% and require them to immediately inform the landlord if their situation positively changes. All rent reductions should able to be reviewed by either party every two months.
- Payment plans rather than rent discounts are a valid option for many situations.
I suspect, the Federal Government will provide rental supplements that they hope will be targeted relatively accurately, but there will be losers as well as winners. A comprehensive solution will be very expensive. It’s a dilemma and I’m not surprised the States and Federal Government are taking their time. I’m looking forward to seeing what they announce.