As a result the national lockdown, commercial tenants and businesses are buckling without income and have been forced to approach their lenders for financial relief.
This often comes in the form of rental holidays and discount agreements. But what exactly does each entail?
The experts answer:
Q: What is the difference between a rent holiday and rent discount agreement?
A: A rent holiday arrangement allows a tenant to withhold payment of rent during either the lockdown period or the lockdown period plus a certain number of months after it has ended to lessen the impact on the tenant’s financial position during such periods. A rent discount arrangement allows a tenant to pay the landlord a reduced monthly rent during either the lockdown period or the lockdown period plus a certain number of months after it has ended, for the same reason as contemplated in the rent holiday arrangement. – Darryl Furman, director at Fluxmans Attorneys
Q: What do I need to understand before considering each option?
A: In terms of the rent holiday, the parties agree to extend the lease period to enable the landlord to recoup the loss of rent suffered during the rent holiday period. The tenant must, however, anticipate that, in arriving at such an arrangement, the lease may need to be extended by a period which is longer than the rent holiday period. Simply extending the lease period by the same amount of time as the rent holiday period will not serve any material financial benefit to the landlord, inasmuch as it will only begin to recoup after the original lease period has come to an end. In terms of a reduced rent arrangement, once the agreed-upon period has elapsed, the tenant is obliged to repay the landlord the amount of the discount afforded during the rent discount period. The parties may agree that such amount be paid in full on a set date or by way of instalments over a certain number of months (potentially with interest being levied on the balance owing). The parties may also agree to a repayment by the tenant, coupled with an extension of the lease period, in order for the landlord to recoup the amount they would have received had there not been a discounted rent period. – Darryl Furman, director at Fluxmans Attorneys
Q: What are the criteria for an SME to qualify for a payment holiday from financial institutions?
A: SMEs need to meet the following criteria:
- Your business must be based in South Africa.
- The annual turnover of your business must be less than R20 million.
- Your accounts and tax must be paid up to date, including payments for last month.
- Your business must be in good standing with the bank.
The payment holiday does not include payments on which your business has already fallen behind. – Hanno Bekker founding director of The Financial and Legal Research Group
Q: As an SME, is it a good idea to apply for a payment holiday?
A: We strongly recommend that SMEs who can afford it avoid making use of the payment holidays. The long-term effect of paying interest on the increased amount after the three-month holiday can have a severe impact on your business’ future cash flow. If there is no alternative, then you should use it, but be aware of the implications. Businesses can mitigate the economic impact of Covid-19 by taking their business digital wherever possible and maintaining contact with their customer base. Rerouting all communication to cellphone lines, video-conferencing and email and transitioning into the e-commerce space can aid in stabilising some of a business’s income and allow entrepreneurs to continue to do business to a certain extent. – Hanno Bekker founding director of The Financial and Legal Research Group