Waiver of rent following the Covid-19 pandemic - Accounting treatment
Waiver of rent following the Covid-19
pandemic Accounting treatment
April 2021 – The Commission des Normes Comptables (CNC/CBN) has recently published a draft opinion on the accounting treatment of a waiver of commercial rent. According to the CNC/CBN, the "loss" of rental income on the part of the lessor should be accounted for in one go and should not be spread over the term of the commercial lease.
Waiver of payment versus benefit
You could consider the waiver of rent as a benefit granted by the lessor to the lessee. The CNC/CBN has previously issued an opinion on benefits granted at the time of entering into a lease agreement. According to this opinion (which specifically deals with benefits granted to the lessee on entering into a lease agreement), the lessor must take the cost of this benefit into account on a straight-line basis as a reduction in rental income.
Let's say you agree with a tenant that you will waive the payment of three months' rent if he renews the commercial lease. In this case, you as the landlord must spread the amount of the waiver over the entire term of the contract. In principle, you must distribute it linearly, but you can opt for another distribution if you think it is more appropriate (e.g. for a degressive distribution, because the importance of the benefit disappears as the contract progresses).
The same reasoning applies to the tenant, who must take the benefit in profit or loss linearly as a reduction in rental costs.
Waiver of rent in the context of the coronavirus crisis is not an advantage
In its draft opinion, however, the CNC/CBN clearly takes a different path. It considers - not without reason - that the waiver of rent cannot be equated with a discount in the context of a commercial negotiation. In the CNC/CBN 's view, the waiver of rent in the context of the coronavirus crisis is rather a compelling necessity due to a lack of liquidity on the part of the tenant.
The CNC/CBN cites the example of the waiver of rent because the leased property (real estate or movable property) cannot be used due to containment. It should be noted in this respect that, unless specifically provided for in the contract, such a waiver of rent is not binding. The case law on this issue is generally - with a few exceptions - favorable to the landlord.
On the other hand, it is almost always preferable for the parties concerned to conclude agreements on this matter. Both the Brussels and Flemish governments support this type of agreement via the commercial lease loan. If the tenant and the landlord agree that the landlord will waive the payment of one month's rent or more, the tenant can borrow a sum of money from the state, which is paid directly to the landlord. The lessor can thus be sure of receiving the rent, while the tenant can spread the rent for the months concerned over a period of two years.
No allocation required
The Board concludes that both the lessor and the lessee do not have to apportion the cost or benefit of the waiver of rent over time, as an expense or income respectively. The waiver of rent is indeed a situation of force majeure related to the pandemic.
If, for example, the lessor waives the payment of three months' rent, the lessor will only have to recognise nine months' rent as income for the year in question. Similarly, the lessee will only recognise an expense for nine months' rent.
Leasing
In the draft opinion, the Commission also addresses the accounting treatment in the context of an operating lease. In this context, the asset concerned is maintained on the lessor's balance sheet.
The contract can be extended for the same period as the waiver.
The lessor and the lessee do not have to allocate the rent reduction over time or as income or expense.
In the case of a finance lease, the asset is on the lessee's balance sheet. In this case, the liability is de facto already recognised separately from the asset concerned. The asset is depreciated by the lessee.
The non-payment of rent will in most cases only relate to the principal amount. If necessary, the amounts to be recorded as long-term liabilities and short-term liabilities will have to be adjusted.
The draft opinion is mainly good news for lessors who do not have to recognise a profit that does not really exist. The CNC/CBN also advises to respect the principle of prudence: if the claim (on the lessee) becomes uncertain, it must also be expressed in the accounts.