State MP ratchets up calls to amend ‘curse’ afflicting small motel operators

by Mike Parker-Brown 26th of October, 2021

State MP ratchets up calls to amend ‘curse’ afflicting small motel operators
Photo by Randy Laybourne on Unsplash

Solution at hand, but urgent action needed to even up playing field

Independent candidate for Wagga Wagga, Dr Joe McGirr MP has called for a review of the NSW Retail Leases Act 1994 to help struggling COVID-affected motel operators, especially those in rural areas, try and rebuild their businesses.

Dr McGirr took particular aim at a section of the act, the Motel Ratchet Clause (MTR), which he described as “the curse afflicting small motel operations.”

Under current legislation, the MTR means that rents do not drop even when market conditions take rents to levels that are far too high.

Sadly, he said, MTRs mean that rents can only go up, regardless of the harsh realities faced by small motel operators, unlike their counterparts in other states who have legislation in place to protect them.

Dr McGirr cited examples of where MTRs have had major impact on people in his electorate who own and operate small motels.

“A husband-and-wife team who operate a 22-room motel purchased a 30-year lease with their lifetime assets, subject to five yearly increments,” he said.

“When they began the market was quite strong, but since then there has been a massive downturn in the industry because of factors such as COVID and short‑term rental accommodation.

“Without government assistance they would not have survived. They say that a ratchet clause in their lease means that the landlords can increase the rent unopposed, ignoring and overriding a fair market review by an independent valuer that clearly identifies the downturn.

“Furthermore, the demands for delayed rent increases, premium monthly rental payments and repayment of accrued deferred payments under the COVID rental code of conduct leave the motel operators in a grim position.

“They are not alone. Another husband-and-wife team has been running a Wagga Wagga motel for 10 years and in that time the rent has increased substantially while the market has decreased.

“They told me of a number of pressures in the market, such as newly built motels, increasing short-term rental accommodation that is subject to far fewer regulations than motels, and increasing costs due to the market domination and commissions payable to overseas-based online travel agents.

Of course, in recent times there have been the COVID‑19 related lockdowns, border closures and restrictions on travel, which frankly have decimated the accommodation business.

“This couple is working 100 hours a week just to stay afloat. They will struggle to recover financially and stand to lose their life savings. They cannot afford to stay, but they cannot afford to go.”

Unlike retail and commercial tenants, Dr McGirr said, motel businesses are purpose-built facilities that cannot, by their very nature, be easily relocated.

Typically, motel leases are long-term agreements featuring an initial term of five years plus options for up to four extensions of five years each. Motel leaseholds cannot be moved from one location to another.

“I understand that motel leases are usually subject to a minimum increase of CPI or 3 percent, usually the greater of the two. In other words, rents can go up but not down, which means that rents remain at unrealistic levels during downturns,” he said.

“Any value assigned by a professional valuer can just be overridden by the ratchet clause.”

However, Dr McGirr said, there is a solution.

“Commercial leases relating to accommodation, particularly small hotel operators, could be included under the Retail Leases Act 1994 with a definition added to include the smaller end of the sector,” he said.

“This would bring New South Wales motel businesses into line with those in other States. It would even up the playing field.

“It would also be a welcome boost as these small motel businesses try to rebuild after the nightmare that COVID has been for their industry.

“Motels play an important role in regional communities. In some communities there may be only one motel. Motel owners are also often asked to give back to their communities through sponsorships and donations to schools, sporting clubs and other community groups.

“They are very much part of the fabric of small rural communities.

I know that the Minister for Finance and Small Business is supportive of this initiative. The indications are that there will be a review of the Retail Leases Act 1994 and this proposal will be considered, but it cannot wait for a prolonged government process.

“Urgent action is needed now.”

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