COVID19: Mandatory Code of Conduct for Commercial Rent

This article seeks to address the accounting considerations when using Cirrus8 for a Property Management business responsible for managing a Commercial Tenancy on behalf of a Landlord during Covid19.

Where a Lessor and Lessee have entered into an arrangement as a result of the Covid19 pandemic and the mandatory code of conduct announced by the Federal Government on 7 April 2020 there are a number of factors to take into considerations.

Key considerations

What is the value of the Waiver? (to be set at least 50% of the reduction in the tenant’s turnover)
What is the period of the Waiver? (to be until the end of the Covid19 pandemic as defined by the Australian Government)
What is the value of the deferred rent (percentage reduction in the tenant's turnover less waiver percentage)?
What is the period of the deferred rent? (to be until the end of the Covid19 pandemic as defined by the Australian Government)
What is the balance of the deferred rent at any point in time (accumulated deferred amount)?
When does the tenant start paying back the accrued (deferred) rent? (earlier of the lease expiry or the end of Covid19 pandemic as defined by the Australian Government)
Recognising the rental income for the owner in the period in which it is earned if accounting to them on the accruals basis
Recognising the rental income for the owner in the period in which it is received if accounting to them on the cash basis
How to correctly account for GST on the cash or accruals basis
If the Lessor agrees to defer rent, are they still accountable to the ATO on the GST on the original rent, or can a component of the GST also be deferred?
The Lessor might have to comply with accounting standard AASB15 with regards to revenue recognition
How to create a tenant invoice which clearly shows the amount due each month
Is the waiver and deferral to apply to the outgoings charge as well?
Will management fees be reduced by the amount of the Waiver?
Will management fees be reduced by the amount of the Deferral?
What happens when there are insufficient funds to pay outgoings expenses from the trust account?
What will be the effect on the variable outgoing reconciliation?
What happens if the tenant vacates- how do you continue charging them deferred rent?
How do you deal with rent increases that were due to happen that are now frozen? Will these be payable later?
How can you help the Landlord monitor the effect on their income caused by the pandemic so that they can assess their eligibility for Government assistance if it is applicable to Landlords?

NOTE: it is possible to use the existing rent account code and simply make appropriate changes to the monthly charges. You will need to carefully check each month's charges and may need to supplement it with manual records.

Rent Increases

Landlords agree to a freeze on rent increases (except for retail leases based on turnover rent) for the duration of the COVID-19 pandemic and a reasonable subsequent recovery period, notwithstanding any arrangements between the landlord and the tenant.

One way to account for rent reviews (increases) due amidst the COVID-19 Pandemic is to implement the rent review in Cirrus8 as you normally would and offset the increase in rent via a new (credit) lease charge. The benefit of this is that once the pandemic is deemed over, or a reasonable subsequent recovery period has passed, you can simply enter a stop charge date against the credit lease charge in order to begin charging rent at the correct rate. Subsequent rent reviews due will also be calculated at the correct rate.

Example:

Tenant Wanderlust Pty Ltd currently charged $2,000.00 per month / $24,000 per year with a 2% Rent Increase due 01/05/2020

Step 1: Process the Rent Review in Cirrus8 resulting in a $40.00 per month / $480.00 per year increase:

Step 2: Add a new Lease Charge using one of the new account codes you have set up (Rent Increase Waiver), with a start charge date being the date of the rent increase. The lease charge should be a negative amount and represent the annual increase amount:

May 2020 Tenant Invoice:

Step 3: Once the COVID-19 pandemic is deemed over, or a reasonable subsequent recovery period has passed, enter a stop charging date against the ‘Rent Increase – Waived’ lease charge, being the date in which the tenant is to start being charged at the increased rate.

It is also recommended that you create a new diary type under configuration (Configuration > System Configuration > Diary Type), specifically for rent increase waivers. Create a diary item each time a rent increase is waived under the relevant lease and once the pandemic is deemed to be over and increases can be implemented, running a diary report on this diary type will provide a list of all waivers that need to be stopped.

System Configuration Recommended (CASH BASIS)

To clearly account for and monitor the effects of the COVID-19 pandemic, it is recommended that some additional accounts be created.

(Please note this section is relevant to properties in which you are accounting to the Landlord on a cash basis. Recommendations for accruals-based accounting are detailed at a later point)

COVID-19 Rental Waiver account 1 – Excluded from management fee calculation:

Create an income account in the owner’s income section to be used for rent waivers (similar to rent free) e.g. account 1031 COVID-19 Rental Waiver.

This will ensure that the property management business still receives management fees on the full rental amount, before the waiver.

COVID-19 Rental Waiver account 2 – Included in management fee calculation:

Create an income account in the owner’s income section to be used for rent waivers (similar to rent free) e.g. account 1032 COVID-19 Rental Waiver.

This will ensure that the property management business management fee is reduced by the waiver put in place.

COVID-19 Outgoings Waiver accounts

Create these variable outgoings income accounts as per the above instructions for rent if also providing waivers of outgoings charges.

COVID-19 Deferred Rent accounts

Create an income account in the owner’s income section to be used for rent deferral. Create a second account if entering into different arrangements for management fee.

Video for instructions on setting up COVID-19 related account codes:

Example 1 - Rent only waiver & deferral

Landlords must offer tenants proportionate reductions in rent payable in the form of waivers and deferrals (as outlined under “definitions,” below) of up to 100% of the amount ordinarily payable, on a case-by-case basis, based on the reduction in the tenant’s trade during the COVID-19 pandemic period and a subsequent reasonable recovery period.

Rental waivers must constitute no less than 50% of the total reduction in rent payable.

Tenant Wanderlust Pty Ltd rent payable is $2,000.00 + GST per month / $24,000.00 + GST per year
Lease term is 01/05/2019 – 30/04/2021
Tenant’s revenue has been reduced by 60% due to the COVID-19 pandemic
Lessor agrees to give a rent only waiver of 30% for 6 months (May 2020 – Oct 2020) and a 30% deferral for rent only for the same period
Deferred rent is payable over 24 months, starting November 2020, which is the deemed date of the end of the pandemic
The Managing Agent and the Landlord agree that the Agent will receive their full management fee in the respective months, i.e. it is not to be reduced by the waiver or deferral.

It is also recommended that you create a new diary type under configuration (Configuration > System Configuration > Diary Type), specifically for deferred rent. Create a diary item each time a rent deferral is put in place under the relevant lease and once the pandemic is deemed to be over and deferred rent can be recovered, running a diary report on this diary type will provide a list of all rent deferral charges that need to be updated using the below steps.

Step 1 – CREATE 2 x NEW LEASE CHARGES

1. COVID-19 Rental Waiver Credit for 6 months from 01/05/2020 to 31/10/2020
TIP 1: Use the account code that is excluded from management fee calculation if you wish to receive full management fees for April.
TIP 2: you must enter a negative amount that represents the annual equivalent of the amount being waived – i.e. 30% of $24,000.00 = $7,200.00):

2. COVID-19 Deferred Rent Lease credit/charge with two charge periods:

The first charge period should be a Credit for 6 months from 01/05/2020 to 31/10/2020
TIP 1: Use the account code that is excluded from management fee calculation if you wish to receive full management fees for April.
TIP 2: you must enter a negative amount that represents the annual equivalent of the amount being deferred – i.e. 30% of $24,000.00 = $7,200.00 ($3,600.00 deferred over 6 months
The second charge period should be a Charge for 24 months from 01/11/2020 – 31/10/2022
TIP: you must enter an amount that represents the annual equivalent of deferred rent being recovered – i.e. total deferred rent of $3,600.00 / 2 years = $1,800.00

Step 2 – MONTHLY INVOICES & RECEIPTING

Raise Standing Charges each month & generate tax invoices, as per normal procedure.

May 2020 – October 2020 Invoices:

November 2020 – April 2021 Invoices:

Receipt Tenant payments as per normal, ensuring you apply the payment to all charges – i.e. payment of $880.00 in May allocated to Commercial Rent charge, COVID-19 Rental Waiver & COVID-19 Deferred Rent:

STEP 3 – VACATE TENANT & RAISE CHARGES

Raise standing charges until the end of the deferral period (i.e. 01/05/2021 – 31/10/2022).
TIP: Tax Invoices will be generated and issued to vacated tenant as part of each months standing charges run
Vacate the Tenant

May 2021 – October 2020 Invoices (after tenant has vacated):

Deferred Rent can be tracked using the Deferred Rent account code:

Example 2 – Outgoings Reductions

Any reduction in statutory charges (e.g. land tax, council rates) or insurance will be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.

The Landlord has been able to receive $8,000.00 relief on Rates & Taxes for the period 01/05/2020 – 31/10/2020
The Tenant occupies 25% of the net lettable area and the Landlord has agreed to pass the benefit to the Tenant ($8,000.00 * 25% = $2,000.00)

CREATE NEW LEASE CHARGE

COVID-19 Outgoings Reduction credit for 6 months from 01/05/2020 – 31/10/2020
TIP: you must enter a negative amount that represents the annual equivalent of the amount being reduced – i.e. $2,000.00 benefit over 6 months equates to $4,000.00 per year.

May 2020 - October 2020 Tenant Invoices:

System Configuration Recommended (ACCRUALS BASIS)

Create a balance sheet account that can be used to record the deferred rental charges on the balance sheet, e.g. 10016 Accrued Income (COVID-19 Assets)

Once again you need to elect whether you want this to be excluded from the management fee calculation or not:

If you exclude it, the Property Management business will receive their management fee when they would have normally received it, i.e. favourable to the Agent
If you include it, the Property Management business will receive management fee in the period in which the tenant pays the deferred rent, i.e. at a later date - unfavourable to the Agent

The balance of this account will represent the total amount of rent deferred at any point in time. The balance will come back to nil when the deferred rent is fully paid.

This can be seen by owners on their owners’ statement and used to determine their eligibility for the Government Jobkeeper Assistance Programme if applicable to Landlords.

We've given two different examples of different complexities below.

Example 3 – Deferred rent

A tenant is due to pay rent of $24,000 for April 2020, however due to the tenant's loss of revenue due to COVID-19, the Lessor and Lessee agree that there can be a deferral of this rent amount over 24 months beginning in May 2020

Step 1 – Charge rent as normal to reflect the income earned for the period

Step 2 – Raise an Accounts Receivable credit to the Accrued Income Balance Sheet Account for the total of the accrued rent (also called deferred rent). This credit must have a different transaction date. From and To dates should reflect the length of the rent deferral.

April Tenant Invoice:

April Owner's Statement:

Step 3 – Create a new lease charge to the Accrued income balance sheet account for $1,000.00 per month for 24 months beginning May 2020.

May Tenant Invoice:

Step 4 – Receipt payment from the tenant each month, allocating it to the charge raised in step 3 and also partly allocating it against the original charge (Step 1) and the credit (Step 2) for the same amount: