Tourism Lease Rent - Due or Not?

With 108 confirmed cases in Male, the Maldives continues to grapple with the community spread of Covid-19 in the Male region. As fears of a full-fledged spread of the virus into the rest of the country is ever so deepening, the Maldives tourism industry outlets largely remain shuttered down.Being responsible for nearly 80% of the country’s foreign currency receipts, the shutdown of the tourism industry has had a cascade effect on the rest of the economy.The comments by the minister of finance in a televised press conference on 24 April 2020 aptly described the crisis we face when he said that the country’s ‘economy is on a ventilator’.Away from the public eye, the tourism industry is fighting its own battle to stay afloat during this downward spiral.The industry shutdown has coincided with the time for payment of lease rent for the second quarter of 2020. The multi-million dollar question before the industry is -  do we have to pay lease rent?The Lease AgreementTechnically, 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.PenaltiesFailure 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.Force majeure eventAs highlighted another day, on this blog, a force majeure event is not applicable unless there is physical destruction of the resort property that is caused due to an event outside the control of the lessee.Insurance obligationEven where destruction of the property occurs due to a qualifying event of force majeure, the lessee is required under the lease agreement to have insured the property inclusive of lease rent equivalent for a year.WaiverThe lease agreement is clear that the government cannot grant a waiver or a release of the rent payment obligation entirely. It can only reschedule the due dates by granting a deferment.The Industry LobbyIn private conversations and exchanges with authorities, the larger number of industry actors have been advocating for a waiver of the Q2 lease rent to help them ride the crisis. Alternatively, they have been asking for a deferment of the rent obligation.The thrust of their argument is that the lease rent is always paid in advance under the lease agreement. Even if the first quarter of 2020 was largely a good one, the lease rent for the past quarter was paid in December 2019.With zero revenue forecasts for Q2 with closed borders, shuttered down properties, loan repayment obligations to overseas banks, recurrent expenditure to maintain properties even in the absence of commercial operations, and fears over the extent of community spread of Covid-19 in the Maldives, the industry is simply unable to pay lease rent for Q2.The Government OfferIndustry’s conversations with the government seem to have registered the point with the relevant officials. The government has acknowledged the predicament faced by the industry and the suffocating effect the virus is having on the industry’s immediate future.In a proposal to MATI, the government has offered to defer the lease rent for Q3 and Q4 into the next year on condition that the resorts pay lease rent for Q2 and pay staff salaries: those receiving a salary under MVR10,000.00 to remain unaffected until June end; all other employees (who get above MVR 10,000.00) to get full pay in April, at least 80% of the pay in May; and at least 50% of the pay in June.The government also has clarified its earlier offer that these resorts would be able to secure working capital facilities via the relief package – that is - US$ 500,000 for each resort.Industry ResponseThe industry has not been able to embrace the government’s offer. Its response to this offer has been only an expression of disheartenment.Current PositionDespite above unsuccessful developments, the government and industry are continuing to keep a constant dialogue.It is earnestly hoped that these discussions between the industry and government would yield a mutually acceptable and practicable solution to the lease rent obligation – each being aware of the dire circumstances the other is in.  This sharply deepening crisis has made one fact obvious: each needs the other.Until such time a solution is found, and in the absence of a clear cut government policy decision to offer an alternative arrangement, the obligation to pay lease rent would continue to apply; and failure to pay rent will continue to attract penalties.