Coronavirus and the Potential Decimation of Asia's Tourism Sector

February 5, 2020 Edward Dever

Some time ago, I wrote a post on business survival using a cash flow waterfall. (Cash Flow Waterfalls.)

In the past few weeks, we have seen the emergence of the Coronavirus (2019-nCoV) in China. Airline travel has led to the spread of the virus to numerous countries, including Australia. Strict air travel policies are now in force restricting travel from China and requiring self-quarantine measures by Australians returning from China.

South East Asia is in the middle of its tourism high season. Typically, this runs from November to March in places such as Thailand, Vietnam, Cambodia and Myanmar. Cash flow from the high season allows tourism operators to get through low season when less travellers visit these countries.

Travel restrictions on flights from China and Chinese travellers are likely to have a catastrophic impact on tourism operators relying on outbound tourism from China.

The 'fear factor' will impact other markets who normally visit South East Asia at this time. Traditionally, the US market is hyper-sensitive to disaster and medical-related events in Asia (think SARS, MERS, 2004 Tsunami). Expect significant cancellations.

Most tourism operators would now be throwing their 2020 sales forecasts in the bin. Thailand's tourism authority is pessimistically forecasting a drop in tourism of 80% year-on-year for January to April.

It is not clear how long it will take authorities in China and elsewhere to reach the point where new Coronavirus infections plateau and decrease.

For any tourism operator or ancillary business, it is essential to look at adopting a cash flow waterfall to manage creditor payments over the coming high season months and then over low season.

For those around during SARS, we remember the impact on tourism and companies asking employees to take leave or reduce to 3 or 4 day work weeks. There is always a light at the end of the tunnel but there will be some juggling of business cash flow between now and then.

PELEN

February 2020

The content of this publication is intended to provide a general overview on matters which may be of interest. It is not intended to be comprehensive. It does not constitute advice in relation to particular circumstances nor does it constitute the provision of legal services, legal advice or financial product advice.

Squeezing the last cent out of a dead tenant?

January 29, 2020 Edward Dever

A recent article highlights the timing of the end of a tenancy when a tenant dies - Woman’s estate ordered to pay three weeks’ rent after her death

As a landlord, you hope that tenants don't die. But it does happen. In Qld, generally the tenancy ends two weeks after notice of the death (Qld RTA - death of a sole tenant).

I view the date of death as the end of the tenancy. I see no point requesting written notice from the deceased tenant's relatives at a time when they should be focused on other things. While formalities need to be addressed, a landlord should make things as easy as possible for the deceased's relatives.

There are ways of trimming costs from property ownership without trying to squeeze the last cent out of a dead tenant. Not every landlord would agree with that.

You can make the property ready for the next tenant in a way which makes the process as simple and helpful as possible for the deceased tenant's relatives. An agent who genuinely shows empathy in these situations is also helpful.

A simple rule of thumb is how would I like to be treated in similar circumstances.

PELEN

January 2020

Presentation Slums Mission Bangkok - Plaque Presentation - January 2020

January 21, 2020 Edward Dever

Brian Cranston's character, Jack O'Donnell, in the film Argo says at one point: "If we wanted applause, we would have joined the circus."

It is a sentiment I often agree with. However, the recognition of my efforts over many years by the Presentation Sisters is happily accepted.

The plaque was presented at a breakfast recently at the Sofitel Hotel in Bangkok.

A less known fact - apart from all the mission work they do in Asia and other places, the Presentation Sisters operate 141 schools in Australia and four in New Zealand.

All the volunteers who helped Sister Joan and her Presentation Slums Mission Bangkok over the years were able to witness something quite special.

PELEN

January 2020

Queensland Residential Tenancy Reform Proposals

January 8, 2020 Edward Dever

Set out below are the Queensland Government's preferred residential tenancy reform options:

1. Minimum Housing Standards

Option 5: Prescribe minimum housing standards for rental accommodation supported by enhanced repair and maintenance provisions

2. Renting with pets

Option 4 – a range of amendments to the RTRA Act to strengthen a tenant’s options regarding the keeping of a pet on rental property, but also to safeguard the ability of the property owner to refuse to accommodate a pet where there are reasonable grounds to do so.

Option 6 – The RTRA Act would be amended to allow a specific pet bond to be charged and kept separate from the general bond.

3. Minor modifications

Option 3 – Establish mechanisms to manage minor modifications with appropriate safeguards. A definition for a ‘minor modification’ would be introduced to the RTRA Act. Owners would be required to seek a pre-emptive QCAT order to refuse minor changes required for health, safety, accessibility and security reasons.

4. Domestic and family violence

Option 3 – Tenancy law protections for people experiencing DFV would be improved to support them to end tenancies quickly and safely, limit their liability for end of tenancy costs, streamline access to their bond contribution, and more easily install safety and security measures.

5. Ending a tenancy fairly

Option 5 - Remove the ability for owners to end tenancy agreements without grounds but introduce a number of additional grounds to end tenancies under the RTRA Act

The deadline for submissions was 8 January 2020.

PELEN submitted a detailed submission dealing with a number of these issues.

https://www.yoursayhpw.engagementhq.com/give-feedback-renting-in-qld

PELEN

January 2020

When declining new vehicle sales became a crisis

December 31, 2019 Edward Dever

New vehicle sales are often regarded as a good barometer of the economy.

As at November 2019, new vehicle sales in Australia were down 8.2% on 2018 figures, the worst figures since 2011. (https://www.caradvice.com.au/811764/vfacts-november-2019-sales-results/). The overall 2019 figures are unlikely to be any better as consumers and government reduce purchases.

As 2019 becomes 2020, 2019-manufactured vehicles become old stock and dealers will be desperate to quit them. (A number of vehicle manufacturers would still be stuck with 2018-made vehicles.)

Australian new vehicle sales are clearly hurting vehicle importers. Mazda's decision to relocate part of its production from Thailand back to Japan can be partially explained by the high Thai Baht. Another factor would be weak demand in Australia. Mazda sales in Australia were down 30.7% in November (https://www.caradvice.com.au/811764/vfacts-november-2019-sales-results/_).

The dismal state of vehicle sales reminds me of a story from Thailand's restructuring era.

In the lead up to the 1997 financial crisis, the head of Thailand's main Mercedes-Benz importer had continued to make vast orders for vehicles. With sales slowing, he failed to heed Stuttgart's pleas and kept order levels at boom-time levels.

When the financial crisis hit Thailand and the dilemma facing Mercedes-Benz in Thailand was revealed, there were over 20,000 brand new Mercedes-Benz vehicles stored in warehouses throughout Bangkok. Some of these were SKD or semi-knocked down units which required partial assembly in Thailand and afforded the importer a partial tax exemption. Many of these vehicles were manufactured several years earlier and were rapidly depreciating.

Quickly selling these vehicles would have affected sales of newly imported Mercedes-Benz vehicles and also impaired the brand's image in Thailand. So a decision was made to lease large numbers of the vehicles to the hotels in Thailand on favourable terms through Mercedes-Benz's newly-established local vehicle leasing operation. This company had largely escaped the crisis hitting other companies offering vehicle leasing and hire purchase and, over time, was able to assist with clearing the vast vehicle inventory.

It is highly unlikely one of the Australian vehicle distributors has a similar number of vehicles hidden in warehouses in places like Sydney or Melbourne. However, it would be surprising if the new vehicle sales figures are completely accurate and there is not some form of continued fudging of the sales figures through dealers registering "cyber cars" and other arrangements (https://www.abc.net.au/news/2018-12-04/car-dealers-over-reporting-number-cars-sold/10580478).

December 2019

Why Don't More Landlords Install Fire Blankets?

October 18, 2019 Edward Dever

I was recently asked for my suggestion on the best risk minimisation factor for residential rental properties.

A number of managing agents have been circulating their annual fire safety tips and none has touched on this issue. Yes, you should have adequate insurance and you must comply with the relevant state legislation on smoke alarms and, in Queensland, start gearing up for the more stringent smoke alarm requirements effective in January 2022.

However, beyond the legal requirements on landlords, you should install a fire blanket in the kitchen of any residential rental property you own. It simply makes good sense.

One of the main fire risk danger areas in any residential rental property is the kitchen and the risk of stove top or hot plate fires. Any fire needs to be extinguished quickly to prevent the spread of flames, damage to the property and the risk of injury to the tenant. In the unfortunate event of a fire, ready access to a fire blanket may enable a tenant to smother the flames and minimise damage to the property and risk to themselves.

Fire blankets are a sensible pro-active approach to fire risk management and should be considered an essential addition to any residential rental property. They are inexpensive (less than $10.00 each from retailers such as Bunnings) and should be checked between tenancies to determine if a replacement is needed.

I am always amazed when I talk to managing agents that more landlords do not install fire blankets in their residential rental properties. There are times when it makes sense to think beyond the strict legal responsibilities of a landlord. I expect any landlord who suffers a fire in one of their kitchens would regret their decision not to spend the cost of a couple of cups of coffee on this measure.

To date, I have only ever had one fire blanket used but its availability at the time doubtless saved money and minimised the risk of harm to the tenant and neighbouring tenants.

Of all the measures that landlords can take to protect their investments, one of the best measures is also one of the least expensive.

Make sure you put one in your own kitchen as well.

PELEN

October 2019

Australian Companies in Asia - Getting Stuck in Asia's Corporate Quicksand

February 17, 2019 Edward Dever

The reported plight of Australian casino operator Donaco at the hands of the vendor of one of its main assets highlights the risks associated with investing in countries where the rule of law is scarce and corruption is rife.

Donaco's disclosed problems in the Cambodian border town of Poipet (See - Article) show how foreign companies can often end up in cascading legal problems when Asia ventures involving local operators turn sour.

While it may appear sensible on paper to purchase a business in a foreign country and then provide incentives to the local party to continue to operate it on your behalf, what often occurs is the local party continues to treat the business as their own - regarding the purchase price as a windfall gain. I often refer to this as the absent owner syndrome where foreign companies expect levels of governance and adherence to contract terms that they would find in their home countries.

Where the business being purchased is a significant player in an industry and country known for corrupt practices, it is likely that the local party has significant political connections. Any foreign company hoping to succeed would need equivalent or superior political connections which may fall foul of their home country's foreign corrupt practices regime. Seeking to rely on the local party's political connections increases the risk that those connections may be used against the foreign party in the event of a dispute.

Where disputes arise, foreign companies can expect several things, some of which seem evident in the Donaco example.

First, do not expect non-compete terms to be very helpful. In some parts of Asia, they are rarely enforced or are enforced in only limited respects. Often, the damage has been done before the foreign company either notices something has happened or is able to take any action.

Where, due to local laws or other reasons, the vendor retains control over the land on which the business is situated, expect unreasonable attempts to interfere with the foreign company's rights. This can include wrongful termination of any leasehold interest, cutting off all access or cutting off electricity and water. Where possible, ventures should be located on land independent of the local party where the foreigner is legally entitled to exercise control. While not feasible in all cases, anything less than freehold control increases the risk of adverse action in the event of a dispute.

Expect counter attacks. On multiple fronts. Defamation proceedings are often used as a weapon in any dispute or negotiation. Where defamation in particular countries constitutes a criminal offence, criminal proceedings may be brought against the foreign company's directors or local foreign representatives. Such action may mean foreign directors have to avoid visiting the jurisdiction until the matter is resolved. For local foreign representatives, it may mean lengthy meetings with lawyers and court proceedings which dilute the time available to deal with the main dispute. Laws such as Thailand's Computer Crime Act can be used to great effect to distract and derail a foreign company's attempts to deal with the original dispute. Even local work permit laws can be used as a weapon to harass local foreign representatives or foreign company directors visiting for negotiation purposes.

By forcing the foreign company to battle legal proceedings and harassment on multiple fronts, the local party may hope to reach a point where the foreign party will do almost anything just to resolve the dispute. It is at that point that the local party may be willing to negotiate a resolution. In some cases, this involves the foreign party virtually giving the business back to the local party and writing off the whole experience. An exception is where the local party considers a loss of face is involved. In such a case, there may be no prospect of negotiation at all.

While there is always the possibility of stellar investment returns in parts of Asia, foreign companies need to enter negotiations with their eyes open to the risks which are inherent in this region. A failure to do so can cost the company's shareholders dearly.

This article highlights the general risks to foreign investors investing in Asia. It uses the recent disclosures by Donaco Ltd to highlight those risks. Neither PELEN nor Edward Dever are involved in the matters involving Donaco Ltd.

PELEN

February 2019

Submission to Queensland Government on Proposed Tenancy Reforms

December 19, 2018 Edward Dever

Set out below is an edited version of a submission made to the Queensland Government in relation to its proposed tenancy reforms. The deadline for submissions was 30 November 2018.

MEMORANDUM

Reference is made to the proposed changes to Queensland's tenancy laws.

We note that there is a possibility that Queensland will follow the Victorian model of allowing tenants to keep animals on a rental property as of right unless the landlord obtains a contrary order from VCAT. (https://www.vic.gov.au/rentfair/pets-are-welcome.html)

Should the Victorian model regarding animals be adopted in Queensland, we have a number of concerns as follows:

Landlords would be required, as an example, to allow tenants to keep a dog (of any size) in each rental property as of right, unless one could successfully argue against this, presumably with QCAT. In our view, certain properties are not suitable for animals such as dogs. Landlords would therefore be required to obtain orders from QCAT to allow them to refuse to permit animals in their properties.
Where properties rent on either a six- or twelve-month lease, it is possible that landlords with multiple properties would need to submit a significant number of applications per year to QCAT. While we agree that is unlikely that all tenants would wish to keep a dog or other animal, a high number of applications remains a possibility.
QCAT has confirmed that the current estimated timeframe for hearing an animal related order (a non-urgent tenancy related matter) following the conciliation process managed by the Residential Tenancies Authority is twenty weeks from lodgement to hearing. Without some form of streamlined process, it is unlikely that a matter would be resolved until most of a six-month tenancy has expired.
It is likely that QCAT would require additional funding and staff levels to deal with the potential significant number of applications from landlords in Queensland seeking animal related orders. QCAT have previously noted that “the judicial structure of the tribunal remains inadequate to address the caseload issues, the appeal load and the provision of the necessary management support to the tribunal. Additional staff and space is urgently required.” (https://www.qcat.qld.gov.au/__data/assets/pdf_file/0011/559928/qcat-annual-report-2016-17.pdf)
Where rental properties have no front fence, no driveway gate and no exterior fenced exclusive use areas for tenants to keep animals such as dogs, these animals would need to remain in each unit at all times, including while the tenant was at work. This is likely to cause significant nuisance to neighbours. Multiple dogs residing in different units in a complex would likely increase the nuisance to neighbours. In our view, this would lead to increased tenant turnover.
Without modification, the requirement to allow animals such as dogs would put landlords in breach of certain Council requirements regarding the maximum permitted number of dogs on premises. It is not clear whether landlords would be required to make excess pet applications and whether such an application would need to be completed on a continual basis as tenants move in and out with animals such as dogs.
In one apartment complex example, without the right to refuse animals such as dogs, a situation could arise where there is a maximum of 16 dogs across eight apartments. This is based on the maximum number of dogs permitted per unit under the relevant Council regulations. Such an outcome is likely to result in significant nuisance to neighbours and increased tenant turnover within the apartment complex. Landlords and community title schemes should retain the right to refuse animals on reasonable grounds.
Pet bonds equivalent to, for example, four weeks rent are unlikely to cover the damage which may be incurred by landlords from animals, particularly for premises rented on a furnished basis.
The costs related to QCAT proceedings and any relevant council permit applications as well as likely increased tenant turnover would put upward pressure on rents.

Should the Queensland Government consider adopting the Victorian model of allowing tenants to keep animals on a rental property as of right, we would suggest the following points:

That the Queensland Government defer following the Victorian model until such time as the Victorian model is fully implemented and problems associated with this model can be identified, including issues related to the additional burden placed on VCAT. All the Victorian reforms are expected to be implemented by 1 July 2020. (https://www.vic.gov.au/rentfair/pets-are-welcome.html)
That landlords be permitted to refuse to allow animals such as dogs on reasonable grounds such as the type and size of animal, size of the property, lack of appropriate fencing or outdoor areas and proximity to other dwellings. The Queensland Government should recognise that certain premises such as small units and units close together are not suitable for all types of animals. Landlords are best placed to determine what animals are suitable for particular types of premises.
That community title schemes in Queensland retain the right to refuse to allow animals on reasonable grounds.
If landlords are required to make application to QCAT in order to refuse to allow an animal, a system be introduced whereby a landlord could make a once-off application in relation to a particular property rather than needing to make repeated applications to QCAT as new tenants lease the property and seek to keep animals. An alternative would be to allow such an application to be made in relation to a particular property, for example, once every three years. This would reduce the cost and administrative burden on both landlords and QCAT.

PELEN

November 2018

When Non-Lawyers Engage in Legal Work - The Hidden IED in Companies in Asia

August 24, 2018 Edward Dever

There is an old saying that a small amount of legal knowledge is a dangerous thing. Worse still is no legal knowledge at all. Any lawyer with exposure to Asia business transactions and work with companies based in Asia can provide examples of legal documents prepared or modified by non-lawyers that are, at best, unenforceable and, at worst, create significant potential liabilities.

At one point, I was working with part of a conglomerate in Asia. One of their previous marketing campaigns came across my desk. The marketing team had created a high-profile advertising campaign for their new product around a Hollywood action star’s image and the name of one of his famous movie franchises. Obtaining consent for use of the star’s image and to appropriate the movie franchise’s iconic name seemed to have escaped the attention of the marketing team and management. No one had thought to consult either internal or external lawyers. Fortunately, the misuse of the image and name also escaped the attention of the Hollywood studio and the campaign never again saw the light of day.

In any due diligence exercise in Asia, one of the more important questions to ask, and one that is rarely asked in transactions involving small to mid-sized targets, is who does the target company's legal work? Often, these companies may regard themselves as too small to hire in-house legal counsel and budget considerations limit their use of outside counsel. In these circumstances, it falls to management to resolve legal issues and deal with contract issues. Although attitudes are changing, many companies in parts of Asia simply do not see the need for lawyer involvement in transaction work and other issues.

A prime risk of non-lawyers engaging in legal work is that there may be hidden risks in contracts where management has not fully appreciated the legal implications of certain provisions in a contract and has agreed to provisions which are not in the company's best interests and which may come back to haunt any buyer. Examining material contracts in detail is a crucial part of any due diligence.

Contract provisions which may have been effective at one point in time may now be outdated given changes to the law. Non-lawyers may not be up to date with recent local and international legal developments which may affect liability under contracts or their enforceability. This is particularly true of day-to-day documents such as employment agreements and standardised sales contracts. Often, these are rarely updated or may be changed on a piecemeal basis without considering the implication of such changes on the rest of the contract. This may create inconsistencies or affect the contract’s enforceability.

A further risk to companies and to any buyer is regulatory compliance failure. While many companies in Asia have government affairs teams to deal with regulatory issues, they are often more focused on personal relationships with government departments to improve efficiency of government dealings. There is a significant compliance risk of using non-lawyers for regulatory issues. Regulatory compliance failures expose the company, its directors and management to potential civil and criminal penalties. While representations and warranties under a purchase agreement may afford financial recourse to a buyer for any such failures, the buyer will still need to remedy the failures and implement systems to ensure future compliance.

Ultimately, companies need to balance the cost of using external legal counsel or employing in-house legal counsel against the liability risk of problems occurring if management is reliant on its own resources to resolve legal issues.

PELEN

August 2018

Community Title Schemes - Slow and Steady Wins The Race

June 5, 2018 Edward Dever

If you are the member of a Community Title Scheme, you would be aware of how difficult it can be to gain agreement for expenditure and completing necessary works. Often, much time is wasted holding Committee Meetings or General Meetings only to have resolutions defeated.

This is a particular problem with older apartment complexes, especially if the works involve special levies. Agreement to proceed can be difficult to obtain where a number of owners are not involved and those who take an interest are against incurring costs. This can result in a stalemate where necessary repairs and upgrades are not undertaken and the complex becomes less attractive for tenants, impacting owners' income and investment returns. In areas where newer, more attractive developments are being built and rental vacancy rates are increasing, there is a continual need to maintain and improve the complex common areas to attract tenants and ensure their retention.

In my experience, there are two key factors to a successful community title scheme.

First, in order to ensure resolutions are passed at either Committee Meetings or General Meeting, you should try to build a broad consensus to the proposals ahead of any meeting. Many owners are frustrated when blindsided by expenditure requests in meeting agenda. It is preferable to flag these issues early and gain agreement for the expenditure before anyone sets foot in a meeting room. By building consensus among the owner group, the risk of resolutions being defeated and the associated waste of people's time and scheme funds should be minimised. The meeting should be a mere formality.

Second, accept that progress is sometimes slow and incremental. Modernising a complex is often akin to a jigsaw puzzle, working on different pieces while considering the overall picture. Unless your scheme is awash with funds and can afford a project manager to complete all project items at once, you may need to adopt an incremental approach - making progress based on time and funding constraints. Choose projects based both on a strict order of necessity subject to available funding. Ensure progress is made before asking owners for any special levies. Owners are far more likely to agree to special levy payments if they are able to see where progress has been made and are satisfied with progress to date. Works which involve safety issues are an exception and should proceed as a priority in any upgrade timeline.

Obviously, it helps if the owners are in general agreement on expenditure and maintenance issues. I have seen examples where the level of acrimony between owners is so bad that certain owners will vote against particular resolutions merely on the basis of their dislike of the person proposing the resolution, dislike of particularly committee members or the committee in general. Mediation in these circumstances may help but involves additional time and cost commitments.

PELEN

June 2018