Expired property leases placing investors at risk

Specialist adviser Mark Ellem said investors need to ensure these lease agreements are still current and that the terms of the lease are being followed correctly. If they don’t, these agreements will no longer be considered “enforceable by legal proceedings”, he warned, which could create some headaches for these investors.

Speaking in a webinar hosted by actuarial certificate provider Accurium, Mr Ellem stated that the ATO is providing SMSFs with compliance relief in relation to some of the compliance issues that can arise from a reduction in rent.

“The ATO will provide relief from compliance action, provided the [rent] relief is temporary and that it is due to the financial effects of COVID-19, so that it was reasonable to give the related party that relief, and that it is on commercial grounds,” Mr Ellem explained.

In order to do that, Mr Ellem said these investors either need to apply the Mandatory Code of Conduct or provide other third party evidence that the relief provided is commercial. This also needs to be properly documented.

The Mandatory Code of Conduct was introduced by the federal government in April and outlines a set of good faith leasing principles to support negotiations between landlords and their tenants.

“We also need to ensure that the lease is current. There needs to be a lease agreement in place in relation to the lease of the business real property from the SMSF as the landlord to the related party,” Mr Ellem warned.

If the lease agreement has expired or the terms of the lease are no longer being followed, Mr Ellem warned that this places the property at risk of becoming an in-house asset. In-house assets cannot comprise more than 5 per cent of the assets in the SMSF, he warned.

“I’ve seen a number of occasions where at the start of the lease for the business real property to the related party business, everything is done correctly, the lease is drafted with the relevant terms, but then it gets filed away and forgotten about, until it’s pointed out by the SMSF auditor,” he cautioned.

“The SMSF auditor [then points out] that the lease has expired some time ago, or perhaps the rent is not being paid in accordance with the terms of the lease, in that when it got to the end of a particular period it was meant to be indexed to CPI and it hasn’t been indexed.”

Mr Ellem said it is therefore prudent to review these leases, and not just because of COVID-19, to ensure they are current and that the terms of the lease agreement have been followed.

“It should be raised on an annual basis when annual accounts are looked at and before everything is handed over the SMSF auditor for the annual audit,” he stressed.