(The article touches on CSR payments – CP Extension – Rent Deferment – Fine Reduction).
As the new year dawned us, the Ministry of Tourism brought out a bundle of new policy interventions: some in the form changes to tourism law; and some in the form of revisions to tourism regulations.
The new rules are all found in a single set of regulations called the Second Amendment to the Regulations on Construction Period Extension and Deferment of Rent and Fines (No: 2020/R-127) published on 28 December 2020.
CSR Payments, how charged
Maldives tourism industry uses the term Corporate Social Responsibility or CSR in a rather unique and indigenous context.
The Ministry of Tourism uses the term in a mutated form, referring to a collection of a payment that is primarily received into a tourism trust fund maintained at the Ministry of Finance.
The payment is levied at the time an extension is sought to the construction period that is provided in the lease agreement; or when an extension is sought to an extension of that construction period. In short, the CSR payment is charged each time there is an extension of the construction period.
The fact of imposition of the payment has not changed from its inception several years ago. However, the manner of imposition and amount charged have undergone previous revisions.
According to the most recently development, the amount of the CSR payment is derived based on a formula provided in the regulations. There is a schedule that divides the country into six zones and provides a set of rates for each zone based on a combination of land area and number of months sought in extension.
The schedule provides the rates applicable on a per month basis. Additionally, the new rules limit the maximum extension to 36 months.
CSR payment, how paid
The erstwhile practice was that the entire CSR amount was payable at extension. The Ministry of Tourism extends the CP by way of an addendum and one of the prerequisites to signing that addendum is submission of evidence of payment of the CSR payment.
Under the recently launched regulations, the applicant does not have to make that payment immediately. The applicant would only have to agree and commit to payment over a period of 3 years – that also from the date of commencement of operation of the property and not from the date of the CP extension.
Deferred rent, how paid
The new regulations are clear that all rent and fines accumulated until the extension of the construction period, plus the rent and fines that would otherwise become payable during the extended construction period, would both be deferred.
However, in sharp contrast to the previous policy, the applicant is now provided with two options as regards payment of the deferred payment: first option is an interest free option to pay within 5 years and the second is an interest bearing option to pay over the rest of the lease period.
Option one – the applicant can elect to pay the deferred rent over a period of 5 years starting from the 3rd year of operation (after a two – year grace period from start of operation) in quarterly installments spread over 5 years – with no interest charged on the balance.
Option two – the applicant can elect to pay the deferred rent spread across the entire unused lease period commencing from the 3rd year of operation (after a two – year grace period from start of operation) in quarterly installments, but with an annual interest at 3% charged on the balance.
If an applicant is asking for a construction period extension under these new rules, the applicant will have to agree to one of the two options over payment of deferred lease rent, even if in a previous extension exercise, the same applicant may have been given a different (or even better) set of payment terms in respect of its deferred rent and fines.
Wiping out the fines
An applicant, already burdened with a large weight of fines accumulated at the rate of 0.5% per day, may now apply under these new rules for a construction period extension and have a substantial chunk of its fines cancelled out.
That is because the new regulations have introduced a different formula to calculate fines associated with late payment of lease rent. Instead of the infamous 0.5% per day charge, the new rules speak of a 0.0493% per day charge and effectively gives this formula retrospective application – rather indirectly – by allowing all accumulated fines to be recalibrated at the rate of 0.0493% per day and wiping out all excess amounts.
Additionally, the applicant will be able to settle the revised fines by adding them into one of the deferred rent options to be chosen by an applicant for a CP extension (See explanation under “deferred rent how paid”).
Three months to apply
A party who wishes to claim the benefit of these newly introduced concessions is to make the application within three months, and the window is set to expire by 29 March 2021.
If a party suffering from an expired CP, an incomplete development, a mountain of unpaid rent and an obnoxious chunk of accumulated fines and still does not take action to avail the benefit of these regulations, is reminded by these regulations that the Ministry of Tourism may terminate its lease agreement (if the application is not made within the three-month period).
The dangerous provision
While several of these new policy interventions are welcome, concessional, and appreciated, there is also a rather dangerous provision in the new regulations.
Every applicant needs to be aware of the existence of this provision and its disastrous implications.
In simple terms, the provision says this – the construction period would be extended by an amendment to the lease agreement, and in that amendment there would be included a clause to the following effect: if even after extending the construction period, the property has not achieved development that is adequate to commence operations within the construction period (so extended), the lease agreement between the parties is set to expire automatically, on its own.
Urgent action required
If you feel that your property is (or would likely be) affected by these new policy interventions, it may be helpful to assess the property and its specific circumstances and apply under these new regulations as early as may be practicable – and at any rate before the first quarter of this year slips by.