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Urgent SMSF Advice – Can I reduce the rent from my related party tenant?

My thoughts and prayers are going out today to those affected by this crisis.

I have already directly spoken to clients in the hospitality industry that sadly have to close their doors today.      

As a flow on they are having immediate discussions with their landlord to freeze or re-negotiate tenancy agreements.

There will, of course, be many situations where a related SMSF owns and leases this business property.

We have taken several calls from accountants as to whether an SMSF can legally renegotiate a reduction or freeze in lease payments without breaching the SIS Act.

And if so, what should they consider and document?

The answer of course is Yes, but please ensure…

At its core, a lease is a legal agreement between two parties which can be varied as set out in the agreement or by request by either party.

As I see it the hurdle to overcome is the arm’s length requirements of section 109 which requires parties to act at arm’s length.

Suggested Steps to Consider

1. The related tenant should formally write to the SMSF trustees requesting assistance during the current crisis.   The letter should detail how the tenant has been affected, outline the financial impact on ability to pay the current lease and make a proposal for changes to current arrangements.

2. The SMSF Trustees should minute receipt of this letter and agree to consider the request.

3. The Trustees to seek advice on the clauses in the current lease agreement that allow for lease review and/or renegotiation

4. The Trustees to review the current market place and seek advice from qualified persons.  Some things to consider

  • What is the ability to find another tenant in the short to medium term and at what lease rate?
  • Should assistance be short term (reviewed monthly)?
  • Do the Trustees feel that the tenant will have a viable business once the crisis abates?
  • Is the proposal reasonable and consistent with current market conditions given the current crisis?

5. The SMSF Trustees should minute the outcomes of point 3 and formally reply to the Tenant agreeing to the proposal or offering a counter proposal.

6. Once agreed, the lease variation is legally documented and executed.

7. The Trustees regularly review the current financial conditions and where appropriate revert to pre-existing arrangements.

Every situation will be different, and I am happy to discuss in confidence your clients’ particular circumstances.

To get in touch, please contact our office on 1300 TRISUP or head to our website for further information.