Tourism Lease Rent Applies for Q2

Update:A day after this post was published, in a televised address to the nation on 20 May 2020, the President of the Maldives has confirmed that tourism lease rent for the later half of this year will be rescheduled. That will be Q3 and Q4.  That also means, Q2 rent will continue to be applied, and charged, as explained in this post. The post chronicles the confusion over whether or not the lease rent will be applicable for Q2. The post is now useful as background only as the President has now put the confusion to rest.The post begins from here:With the ultimate closure of the Maldives borders on 27 March 2020, there was much anxiety over how the tourism industry’s second quarter would take shape. The government decision, essential of course for protecting life, had the unfortunate effect of putting the lights out on potential tourism revenue for the second quarter of 2020.As the lockdown crystallized, and resorts, hotels and guesthouses brought their shutters down, tourism was effectively ordered into hibernation.Expectation for Rent ReliefThe government decision to close the country’s borders gave birth to an expectation within the industry that the government would help the industry absorb the sudden shock by granting some relief in the form of rescheduling (if not excusing) the lease rent payment due at the end of March 2020. That was the lease rent installment due for the second quarter as lease rent is always payable in advance for each quarter – according to the island lease agreements resort owners have with the government.Obviously, this expectation created a trajectory of dialogue between leading industry actors and government officials.The Government Offer When a written proposal from the government was finally communicated to the Maldives Association of Tourism Industry (MATI), it proposed to defer lease rent for Q3 and Q4 of 2020. The proposed relief was also tied to a key condition that all local employees be retained for three months (from April to June). The proposal also confirmed an offer of a loan facility of US$500,000 for each resort if local staff retention was maintained based on the formula provided in the government’s offer.According to the government, the above offer was developed based on discussions between MATI and government representation. MATI disputed that statement.At the end of the day, the government offer was not found acceptable to leading actors of the industry - according to them for many reasons. First, by the time the offer came, some had already paid the lease rent for Q2 (to avoid unnecessary fines from accumulating over nonpayment); second, most had already taken action on staff matters including layoffs, redundancies, furloughs and pay-cuts; and third, the industry’s request for relief was expectantly over the imminent obligation to pay the second quarter lease rent payment as opposed to a third or fourth quarter.The narrative adopted by the industry leaders is disputed by the government and maintains that the offer provided by the government reflected the agreement reached between representatives of the industry and those at the highest levels of government.The Adverse DevelopmentsThe rejection of the government’s proposal by the leading industry body brought the momentum over the process of dialogue to a premature end. The frustration is evident in the MATI press release of 6 May 2020.The downward spiral continued when a leading cabinet minister expressed strong displeasure over the MATI press release in words he did not once mince. The tourism minister attempted some damage control in a subsequent media appearance by offering a more conciliatory comment towards encouraging continued dialogue.One conclusion is clear. Neither the industry was happy over the government’s approach nor was the industry remarks received well within the core echelons of the government.When this blog first published a post on the topic of tourism lease rent on 25 April 2020, a significant list of industry actors was of the view that it may be worthwhile to delay payment of Q2 lease rent. According to them, it was highly likely that the government may announce a key policy decision anytime on the deferment of lease rent for Q2. That would constitute one of the key steps taken by the government to mitigate the effects induced by Covid-19.Nearly a month later, much seemed to have evolved to adversely affect the fruition of any such expectation.Rule on Lease Rent As indicated in our post of 25 April 2020, the lease agreement which grants the lease of the resort, requires lease rent to be paid in advance for each quarter. By that requirement, the lease rent for the second quarter of 2020 (April, May and June) is due at the end of March.Failure to pay lease rent would attract a penalty of 0.5% of the amount that is due. The penalty is levied for each day of delay, and continues to be applied until such time the lease rent amount and accrued penalties are all paid.The island lease agreement prevents an event of force majeure from being triggered unless there is physical destruction of the resort property that is caused by such an event.MIRA DevelopmentsAs of today, some industry actors have already paid the lease rent installment – principally to avoid penalties in the form of recurring daily fines.By the time the due date of 31 March 2020 arrived, MIRA like many other state institutions had closed its offices and adopted WFH strategies. However, arrangements were made to allow payments made to MIRA to be received via their online portal MIRAconnect.It is confirmed that MIRA is collecting tourism lease rent for Q2. It is also confirmed that usual penalties continue to apply for delayed payment.MIRA’s position is simple. Unless there is a government intervention to waive penalties, MIRA as the tax collector would continue to apply penalties as per the island lease agreement.ConclusionGiven the adverse developments explained above, and MIRA position, it may be time for resort owners who have not paid their lease rent for Q2 of 2020 in expectation of a potential relief from the government to embrace the fact that there may be no imminent relief over the deferment or rescheduling of Q2 rent; the lease rent payment continues to be a live obligation; and penalties continue to apply for delayed payment.