Retail landlords face rental troubles over Covid-19 lockdown

Edcon is not the only worry as other retailers consider not paying rent.
Sapoa says most big retail chains have shareholders and bankers that could provide assistance and that small businesses are the first line of tenants it needs to defend. Image: Dean Hutton, Bloomberg

The Covid-19 lockdown is forcing more retailers into a position where they may not be able to pay their property rentals, which is set to add to the pressures being experienced by retail landlords and South Africa’s struggling listed property sector.

Edcon announced last week that it can only pay workers’ salaries due to the impact of Covid-19 on sales, and now peer clothing giant The Foschini Group (TFG) plans to stop rental payments as a result of the lockdown.

Read: Edcon may not reopen after lockdown

News agency Bloomberg reported at the weekend that TFG, which has had to close all of its stores in South Africa as part of the 21-day lockdown, has sent a letter to its landlords about the stop in rental payments. Moneyweb understands that other retailers, big and small, are also contemplating putting a stop to rental payments as business has ground to a halt.

Only essential services such as grocery stores, medical facilities, pharmacies, fuel stations and banks are allowed to operate during the lockdown, which is aimed at curbing the spread of the Covid-19 pandemic.

Non-essential retailers hard-hit

Clothing groups, DIY stores and general merchandise retailers such as Edcon, TFG, Mr Price, Pepkor (including JD Group), Truworths, and Massmart chains such as Builders Warehouse are set to be hard-hit during this period, with Easter holiday trade being affected.

Edcon alone has some 750 Edgars and Jet stores countrywide, covering around a million square metres in retail space. Better-performing TFG, which has around 29 retail brands including Foschini, American Swiss and Sportscene, has more than 2 500 stores in South Africa covering around 750 000 square metres of retail space.

Covid-19 presents an “unprecedented challenge” to Edcon’s “already constrained cash flow” the group’s CEO Grant Pattison said in a statement.

Following President Cyril Ramaphosa’s first announcement around Covid-19 and the country’s state of disaster measures on March 15, the group said that its turnover had declined 45% in comparison to the same period last year. This resulted its sales for March being R400 million below forecast, while during the 21-day lockdown the group is projecting lost turnover of around R800 million.

Salaries more important

Speaking to Moneyweb, Pattison reiterated that this meant that the group only had enough liquidity to pay salaries, which it sees as a priority amid Covid-19 uncertainty.

“Edcon is unable to honour any other accounts payable during this period and that includes rentals to landlords. We are not alone, and many other businesses are also being badly affected especially under the lockdown,” he said.

Read: Mr Price’s sales down 22.1% since SA declared state of disaster

Pattison added that the group will be working closely with government and other stakeholders to better understand what sort of assistance will be offered to business to mitigate the impact of Covid-19 and the lockdown.

Questioned by Moneyweb about retailers deciding not to pay rent, Neil Gopal, CEO of commercial property advocacy body the South African Property Owners Association (Sapoa), warned that non-payment of rentals could cause the collapse of malls and severely impact retail property firms.

‘Unlawful’

“We have seen correspondence from national retailers, stating that they will not be paying any rent (and even other lease charges) during the lockdown period. In our view, this position is completely incorrect, and unlawful,” he says.

“Every class of tenant [is] approaching landlords for rental remission, rental holidays and now also refusing to pay rental …

“In our view, a total rent remission will probably not be applicable, as the tenant will still be using the premises during this time, and their business assets will still be situated in the premises,” he adds.

Gopal says while Sapoa is sensitive to the issues retailers may face, it is important to note that landlords face the same pressures.

“Landlords are encumbered with debt, still have to pay rates and taxes, and have operational expenses regardless of whether the mall is operating or not.”

Read: Massmart CEO slates ‘ridiculous’ rent escalations

He points out that Ramaphosa and various government departments have also announced various measures to alleviate the economic effects of the lockdown on businesses.

What about insurance?

“Tenants and other businesses should be encouraged to make use of the measures, and to do so in a responsible measure. Also, most lease agreements require tenants to obtain, and keep in place, their own insurance for their businesses, which normally includes business interruption insurance.

“Tenants ought to be encouraged to claim against their insurance first,” he adds.

As a measure to help mitigate the impact of the pandemic on the retail property industry, the Department of Trade, Industry and Competition (DTIC) on March 24 gazetted the Covid-19 Block Exemption for the Retail Property Sector in line with the Disaster Management Act. This effectively loosens rules around certain aspects of the Competition Act to allow retail landlords to work together in responding to Covid-19 issues faced by the sector.

According to the DTIC, which will be the main driver of the block exemption scheme, the new rules will apply only to agreements or “concerted practices” in respect of:

  • Payment holidays and/or rental discounts for tenants;
  • Limitations on the eviction of tenants; and
  • The suspension or adjustment to lease agreement clauses that restrict the designated retail tenants from undertaking reasonable measures required to protect viability during the national disaster.

“To qualify for exemption, such agreements must extend to all South African retail tenants in the designated retail lines, including small and independent retailers. The designated retail tenants covered by this block exemption are identifiable by the designated trading lines, namely: clothing, footwear and home textile retailers; personal care services such as hairdressers, health and beauty salons; and restaurants,” the DTI notes.

Gopal, however, says national retailers are not interpreting the new regulations adequately.

“The unilateral decision by some tenants to stop paying rent is illegal. Most of the national retail chains have shareholders and bankers that could provide assistance during this crisis, but this is likely not the same for small businesses, whom we believe are the first line of tenants we need to defend and who form the majority of the tenant base,” he explains.

“The intention from the presidency was not that landlords bear the full brunt of the lockdown. We too are affected as the payment of utilities and property rates have to continue,” he points out.

“National retailers in most cases are bigger businesses than the landlords,” he adds.

“It is our request that national retailers continue paying their rental – even on a month-to-month basis – to ensure the sustainability of the shopping centres.”

Estienne de Klerk, chairperson of the South African Real Estate Investment Trust (SA Reit) Association tells Moneyweb that there is a scheduled teleconference meeting of property industry stakeholders to come up with response to issues facing landlords and tenants on Monday.

“It includes Sapoa, the SA Reit Association and the South African Council of Shopping Centres – the three biggest industry bodies covering SA’s retail property sector. Both retailers and landlords are facing not a perfect storm, but a perfect hurricane with Covid-19 adding significantly to the country’s economic woes. We want to work together on this,” he says.

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So, sue the tenants and see how far you get. You can’d get blood from a stone. Fact is they have built too many malls. They think more malls means more income. There is only so much money going around. It is just spread over a larger area.

Look…I don’t know what the answer is. But most of these massive malls and their rentals are owned by “pension funds” . None payment of rentals will destroy income flows into these funds, and will directly hit those most likely to be affected by Covid 19….the elderly. This whole situation is a mess for everyone!

You are a absolutely right. Interest rates are the ame two-edged sword.

Hi Suren. Surely given that the non-essential services cannot trade in lock down that it makes sense that governments as part of its state of emergency stops the clock on all time based payments. Employers could then have used annual leave and their balance sheet reserves to pay for their 21 day food and medical needs. The liquidity shortfall should then be provided by the Reserve Bank as banks would have lost their interest receipt in this period from non essential services segment of the economy. They should not recover their lending rate but rather the Repo rate. In other words nobody in the non-essential services sector should be making a profit in these 21 days. No one. The solution to claim from is not an option I don’t believe and insurance companies will probably fight this on whatever legal grounds they have. However insurance premiums should also be reduced by whatever underwriting profits are earned in this period. This is likely to be substantial during lock down with most people being confined to their homes.

Just look at the amounts of rent some businesses have to pay! Crazy

Growthpoint CEO Estienne Van Niekerk can take his arrogant attitude and maybe come down a peg. They are renowned bullies and have absolutely nailed the tenants. Wages first.

Agreed Yster – proper God complex these mall REITS have. Hubris supreme

Could not happen to nicer people like the ultra greedy shopping malls.

And the your pension fund which may own some of these shopping malls.

Will these retailers that refuse to pay landlords also pay no salaries, including cancelling executive bonuses and dividends?

@ Johan

There will be bonuses paid, the “tribe” that it was be for 2019 “performance” and paid just before the crisis :
….you know the story in afrikaans bemarking = bevarking

In the next years, the richest guy in town will be the sheriff!!

Do you honestly think that anyone is going to be paying a bonus or a dividend this year? Do you not understand basic finance?

Bet you that the unions will try and make sure their members get paid ‘n bonus & above inflation increases and strike if not. And that the government employees will get their increase and a full salary and a bonus – it is just going to be private companies bearing the burden. Eskom will be first to implement this and hold country at ransom seeing as people need electricity.

Well in the USA they will be paid, but hey they are not allowed more than twice last years bonus. If you think it will be different here you are being naive.
Secretary Mnuchin is permitted to dispense with the already-feeble limits on CEO compensation (they can get only two times what they earned in 2019!) as well as the suggested restrictions on stock buybacks and dividend payouts by bailed-out companies. Last but not least: these firms are not required to share any upside from the rescue (in the form of an equity stake) with the US government. Heads: company CEOs and investment banks win. Tails: the taxpayer loses.

@WTF….Its obvious YOU are the one that does not know finance and the history of the fat cat CEO’s/executives who continue to draw bonuses and huge pay cheques even when a company is nosediving !!

Wake up and smell the coffee Mr Wet behind the Ears !

You may as well price in a massive valuation reversion now on mall owners.

Less so for convenience center owners.

Similarly the retail landlords would also have insurance cover for business interruption , Suren this raises another important issue , individuals , corporates etc pay billions in insurance premiums annually just for these eventualities, and its time insurance companies start honoring their obligations covered under business interruption or this force majeur instance. Instead of now seeking legal opinion to avoid compensating customers.
Secondly a bit of a diversion but on the topics of rentals (linked to what the new CEO of Makro alluded to on discussion with landlords to reduce rental) , one of a companies biggest costs , in my view should also be categorized under rental costs- IT should be licence fees for IT applications like SAP , Oracle etc. these guys have been milking all industries for years with above market related costs and is similar to rental.These big IT players have been collecting “rent” under the radar for years , in my view we should be reviewing the annual cost escalations and/or whether licence fees should be a once off or annually.However these types of rental costs have a huge impact on economic growth,in some instances are a barrier to entry/competition and price determination of goods and services.

Business interruption cover usually responds to specified events, typically involving material damage, eg destruction by fire. It doesn’t follow that simply because business is interrupted the consequential loss is insured, or even insurable.

Most food and non food anchors in SAs malls have clauses in their leases about automatic reduction of rental if a certain percentage of the Centre does not trade- up to a 100 % reduction. They could have triggered these clauses.

The clearest opinion I (as a layperson) have see on this is from ENS Insight
https://www.ensafrica.com/news/detail/2413/south-africa-covid-19-lockdown-do-tenants-hav/

“…
For those shops and businesses which are to remain closed and operate from leased premises, the question arises as to whether the business owners (being tenants), must continue to pay rent to their respective landlords during the lockdown period.

Indeed, during this period, affected tenants will be deprived of the beneficial enjoyment of the leased premises, as it has become legally impossible for landlords to perform their obligation to give undisturbed use and enjoyment of the leased premises to their tenants.
In South African contract law, a legal impossibility of this nature would generally fall into the category of force majeure or supervening impossibility events. When performance of a contractual obligation becomes impossible, the party responsible for rendering the performance is relieved of its obligation, for the duration of the impossibility, and the other party to the contract is likewise relieved of performing its reciprocal obligation.

In addition to the above general principle, South African law contains a doctrine specific to lease agreements. In terms of this doctrine, a tenant is entitled to claim a total or partial remission of rent if through vis maior (force majeure) it is unable to have undisturbed use and enjoyment of the leased property. In this regard, our courts have found that “A remission is claimable where the enjoyment of the property for the purposes for which it was let is hindered or prevented by some vis maior happening without the default, actual or constructive, of either party”. This quote was approved and applied by the Appellate Division in a case which makes it clear that an act of the legislature preventing performance qualifies as vis maior: “The intervention of the sovereign power, whether by legislation or by executive action, has the quality of vis maior”.

In the circumstances, tenants whose shops/businesses have to remain closed during the lockdown period, would, in principle, be released from their obligation to pay rent, either totally or partially, depending on whether they are totally or partially deprived of the enjoyment contemplated in the lease to which they are bound.
Tenants should, however, be aware that each lease agreement may contain specific provisions regulating force majeure and supervening impossibility events, in a manner that might derogate from the principles described above. Specific legal advice should therefore be obtained in each instance where a tenant wishes to claim remission of rent.”

this is a domino effect — it will go all the way to the Municipalities where the fight will really come.
How will these malls and individuals pay their exorbitant Municipal bills?
We need some kind of reset of our economy reducing the base cost … this starts with government at all levels .. administered prices are killing the economy.

Come hell or high water, the municipality must be paid.

Well let me add my story. In 2017 a regional mall opened in Gauteng, of which I took space for a franchised food outlet.
Firstly, the owners of the building requested a R370 000.00 rental deposit. I know all the clauses about Rental deposit being based on the last three months of the lease, but when you are spending the amount of money a food outlet costs,this was a big dent in my Capex.
When it came to negotiating a tenant allowance, the offer was an absurd R 25.00 a square meter, a grand total of R 13 750.00.
Bear in mind I was spending R3.5 Million.
Two months after opening, I received a Final Tenants account with billing for Extraction, ducting, fresh air supply and smoking room filtration. Nowhere in the lease was this cost ever mentioned and the price of R 150 000.00 plus VAT was 40% higher than I could of arranged with my own supplier.
Of course, upon querying this cost, I was abruptly told that ” How do you expect the Municipality to sign off your occupancy certificate without the correct extraction.” My query was more about the inflated cost of the work, but was deflected to the above response.
In reality, the ostentatious amount has to offset the salaries of the expanded project management team, overpaid center manager, marketing team ( Who did absolutely nothing) and operational expenses in the coming months.
When the initial hype around the Mall opening eased, and the turnovers stagnated, there were threatening calls from the Landlord of how they would turn my electricity off and that they would lock me out and issue me with a Letter of demand.
Fortunately, a consortium offered to buy the store to expand their portfolio, and I managed to sell and get released of the lease. Oh, another point- When they heard I was selling, they wanted a percentage of the small profit I made as a service fee.This I never paid and shall never pay it so Apollo 1- landlord 0.
As you can gather my experience was not a pleasant one and I have no affinity for the landlords and their terrible attitudes. I sympathize with any tenant unable to pay their rentals and if you look at the obscene profits the listed property companies make, they can afford to carry the can for a few months.Just look in their lots the amount of Landcruisers parked.

These landlords have been ruthless for as long as I have been alive. They have never taken their tenants into consideration and only ever negotiate with anchor tenants. They couldn’t care about real business.

Not an ounce of sympathy for retail landlords.

Not.

An.

Ounce.

you’re right they are ruthless. i’ve been losing sleep over this – my business is no longer viable as long as these social distancing restrictions are in place. even offered the landlord to keep my three months deposit so we can just terminate the lease. no go. he still wants full rental. but i simply don’t have the money… also had to let people go… its vicious.

“In our view, a total rent remission will probably not be applicable, as the tenant will still be using the premises during this time, and their business assets will still be situated in the premises,” Gopal.
True but the tenant has no access to the assets. Are they charged storage, or are the assets actually being withheld from the owner against their will, and by whose rules? Its new territory for everyone. They may pay this month after salaries, but they won’t pay next month.

It’s quite simple. If you cant trade, you cant pay rent. It’s the same as if the mall had burnt down. It’s no fault of the tenants.

At the age of 24 I had a couple of retail outlets. One was in a mall and it wasn’t working. I begged, pleaded and even found replacement tenants to take over. They would have none of it. For 2 years, they made me pay every single month every single cent (on now an empty shop) It almost sunk me.

Cry me a river for the mall owners, I love it !!!!

End of comments.

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