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Tenants rights vs landlords rights under lockdown – and the tax implications

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The residential and business property sectors are likely to be gutted for years by the lockdown.

There are scamsters and opportunists on both sides: residential tenants who see the lockdown as an excuse to stop paying rent, and landlords who are using devious methods to evict tenants who are lawfully entitled to ask for leniency.

We recently interviewed Reyno de Beer of the Liberty Fighters Network – which defeated the government in the Joburg High Court over its lockdown regulations (though that decision is being appealed by the government) – on some of the shenanigans going on through the courts to evict tenants who have asked for a rent holiday. Some landlords are abusing the confusion around the court lockdown to get tenants evicted, asking the courts for “spoliation orders” (to restore possession of their properties) on the grounds that they need to do renovations.

It’s a dirty business. Then there are honest landlords we’ve spoken to who tell us that their properties have been hijacked by criminal gangs and are now collecting rent on them. It appears to be rather easy to do: they hire “smart” lawyers who know how hard it has become to evict tenants and fight it every inch of the way. It’s terrifying to think that someone could take over your property by pretending to be a legitimate tenant, pay for a couple of months, and then move onto the next target while renting your property to someone else.

This is going to be messy for years to come. There are also some intricate tax issues related to properties that have emerged as a result of the Covid-19 lockdown.

Tax Consulting recently explored this issue and whether the law permits tenants to receive some form of rental payment relief, and if so, what the tax consequences are. Likewise, if a landlord offers some payment discount, what this will mean for the landlord from a tax perspective.

“Under a lease agreement, landlords bind themselves to give tenants temporary use and enjoyment of property. Tenants, in turn, bind themselves in the lease agreement to pay a rental amount as compensation for that use and enjoyment,” says Tax Consulting.

“In certain instances, a tenant may be disturbed in the use and enjoyment of the leased premises by an extraordinary event (legally known as a vis maior or casus fortuitous), over which neither the tenant nor the landlord could reasonably have foreseen or guarded against. In such an instance, a landlord is not guilty of breach of contract but the tenant may be entitled to a remission/ reduction of the rent; depending on what the particular lease agreement provides. The amount of the remission would then align with the extent of beneficial usage which the tenant has over the leased premises at a given time.”

Income Tax and Provisional Tax Consequences

Where a reduction of rent is permitted in law – which is the case under the Covid-19 lockdown – the landlord can no longer claim entitlement to the full rental amount.

“As a result, the landlord will not be required to pay income tax on the full rental amount specified in the lease agreement. Where the landlord is a provisional taxpayer, the reduced rental amount will also be the only portion on which provisional tax payments will be required to be made by the landlord,” says Tax Consulting.

In the event that the tenant operates a business from the leased premises, the tenant would then also not be entitled to claim the full rental amount (specified in the lease agreement) as an income tax deduction. Instead, the reduced rental amount would be the deduction amount that the tenant would be entitled to.