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Retailers and rent: Opening Pandora’s box

Most big retailers should be able to handle a few weeks of lockdown, yet two of the wealthiest clothing chains are leading the field of non-payers.
With millions of credit customers, these retailers shouldn’t want to be seen supporting a culture of non-payment. Image: Johan Jeppsson, Bloomberg

Since initial publication Moneyweb has learnt that H&M is in fact in discussions with its local landlords and has not indicated that it won’t pay rent. This article has been amended to reflect this. Moneyweb sincerely apologises to H&M and to our readers for the error.

Edcon, the perennial patient, was expected to alert its long-suffering landlords that its already considerably trimmed-back rental obligations were likely to be an early victim of the Covid-19 lockdown.

But for The Foschini Group (TFG) and Pepkor to lead the field of non-payers of rent was unexpected.

One analyst who described the move as irresponsible said the same logic will surely help to justify non-payment by the millions of credit customers of the big retailers.

“The move opens up a Pandora’s box that could have long-term ramifications for the entire sector,” said Sasfin analyst Alec Abraham.

One lawyer told Moneyweb it would be very difficult for retailers to enforce payment by their credit customers before a judge if some of the major retailers themselves had refused to pay their debts.

Efforts, resistance

While every non-grocery retailer will be feeling huge pain during the lockdown many, such as Mr Price and Woolworths have said they will be engaging with their landlords in an effort to come to an acceptable arrangement.

Read: Retail landlord alliance reveals Covid-19 relief package for tenants

The conciliatory position, reflecting the reality that blame cannot be allocated to either of the parties and that this is a battle everyone is facing, is in keeping with the grim mood of the lockdown, said the lawyer.

But not all retailers are inclined to be conciliatory.

TFG has unilaterally decided it will not be paying any rent due at the end of April because of the lockdown. The retailer said it had taken legal advice before deciding to suspend payment. “The decision was not taken lightly and has been guided by legal counsel,” said head of properties Brad Rothenburg.

Read: TFG insists it won’t pay April rent due to lockdown

Abraham describes the decisions as “very, very irresponsible” and believes it will have a cascading impact throughout the retail chain. He believes that although trading has been difficult this year most of the retailers, with the exception of Edcon, should be able to handle a few weeks of lockdown.

There’s certainly little sign of stress in TFG’s balance sheet given that in the six months to end-September 2019 it generated free cash flow of R1.1 billion. Its’ debtors’ book at end-September was R7.5 billion. Financial 2019 (to end-March) wasn’t too bad for the group or its executives. CEO Anthony Thunstrom picked up a R13.4 million bonus on top of his R7 million guaranteed pay for that year. And while the plummeting share price – from R150 in January to a low of R65 at the time of the rent decision – has added to the tension, some have used it as a buying opportunity. Former CEO Doug Murray paid R6 million to add 60 000 shares to his portfolio in late March.

Pepkor has also said it will not be paying rent for the lockdown period and like TFG is relying on exemptions to the Competition Act gazette by Trade and Industry Minister Ebrahim Patel on March 24. The exemptions allow competing landlords and tenants to work together to reduce rentals or permit rental holidays during the lockdown.

Read: Lockdown: Pepkor won’t pay retail landlords either

The once-robust Pepkor has had a fairly torrid time since the implosion over two years ago of its controlling shareholder Steinhoff. The group generated about R7 billion cash in financial 2019 but it’s carrying a hefty debt burden. In mid-March the top three Pepkor executives were awarded a combined R30.6 million of shares at zero cost. The shares will vest over three years.

While H&M has informed landlords in Germany it will not be paying rent and has threatened to exit UK leases early, H&M SA has told Moneyweb it has been in close contact with its local landlords “to find a solution regarding the payment of rent during this extraordinary time.”

The company explained this is “an extreme situation and so, different for each market”. The goal is to find individual solutions as quickly as possible, said H&M, to be able to mitigate the negative effects as far as possible on its side, as well as on the sides of its landlords.

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Kick them out. Immediately.

Addidas tried this trick and very quickly reversed the decision following an outcry from the German government and social media. The TFG says their decision was informed on legal advice. This is not the time to be hiding behind some legal niceties to avoid paying. It’s irresponsible and their shareholders should be telling them so.

They probably have force majuer clauses that let them not pay rent.

Adidas trades in a wealthy civilized country where people have respect for law and order and property rights. Not in Africa where the ANC undermines property and business rights. Spot the difference.

In the mean time TFG sit on all the account payments and refuse to pay their debts. What a perfect scenario to make money. I guess I wont pay my accounts to them either. They can take the account interest and file that away too.

This needed negotiation and compromise, not unilateral action (that could be considered a credit default). It will be Years before the courts sort out what is very poor legal advice on top of very poor leadership decisions.

What was coming, now sooner, is retail space consolidation. We had too much (one of highest sqm per capita in world) and retailers in the future will need less. Like with office space, people are learning to shop and work differently.

So you expect rational people to act rationally under irrational and unreasonable circumstances? It is the business of an entrepreneur to adapt to circumstances. The entrepreneur did not create the circumstances. Nobody asked for his opinion. The government followed the advice of an official and created unreasonable and irrational circumstances for the business owner. He has to adapt to irrationality if he wants to survive.

See this differently. The non-payment of rent is nothing but a scramble for cash, similar to what we have seen across all financial markets with the liquidation of local government bonds and the strengthening of the dollar. The mad “dash for cash” is across the world economy and was triggered by an irresponsible, irrational and myopic decision from an ignorant official and perpetuated by the actions of Central Planning government actions.

For how long will lockdown measures be extended? For how long will my cashflow last? A business owner who does not try anything within his means to raise cash is irresponsible. He will say – “look, after this disaster, someone will be taking me to court for non-payment anyway. It might just as well be the guy I hate the most, the landlord.”

This behaviour was forced upon him by the lockdown measures. The government should pay the rent because they made the call.

The Government in consultation with all parties decided on a total lock down. It was en still is the right thing to do. The government is not responsible for any rental payments. Retailers, like any other business should make provision for unforeseen circumstances.

i doubt very strongly that you have been running your own business for the last 7+ years in south africa

Wow! How monumentally stupid can you be

In consultation with whom, I would like to know? Not business people who are going bankrupt. The idiocy of it all is breathtaking. My grandchildren are walking barefeet ( shoes too small) as clothes are non- essential in RSA. Sin tax money sneered at. Sweden has no lockdown and opted for protecting the vulnerable and acquiring herd immunity. The Netherlands has a very soft approach, also opting for herd immunity. Only time will tell who was right.

Ask Jacob to look under his mattress..

I do have sympathy for the small line shops though. Not for the big guys who can claim loss of profits from their insurance or have huge reserves.

i know it is easier said than done, but every business, does not matter in what format they trade, should build up a reserve fund directly linked to a cash source/ investment, for these lean and mean business periods / events like corona19, but not every institution simply can afford it – every month it’s cash in, cash out to keep afloat

One of my ex clients, owner of 3 restaurants, told me it is only one way for them – closing down, due to the lock down with freezers full of un-utilised easter stock, 100% non-operative but paid staff, zero turnover, paying off the brand-name owners for the revamps, interest to the bank and rent to the landlords all 3 restaurants will be closed down. direct effect of the 3 week experiment – leaves +/- 20 long term staff jobless overnight.

Someone will have to eat this potato, difficult that the landlord is now the target, if the landlord does not pay the bank, then the bank will have to eat it, whichever way, this sounds more like everyone will rather not pay, as long as they do not have to carry the burden. Whichever way, someone will eventually carry the load.

I don’t know about ‘eventually’ – the landlords have to prioritise debt service ahead of distributions, which in some cases are already being deferred or cancelled. So the burden is already, or will very soon be, carried by shareholders, a high proportion of which are pension funds etc and individuals dependent on that income.

The irony is that the line shops, who are most susceptible and who cross subsidize the ‘essential’ supermarkets, cannot fight the landlord and will probably not make it.
The whole equation of setting rent in malls is wrong and in SA the history of monopolisation and exclusive use clauses exacerbates the problem.

SA compensation commission should never have let the retail mall ownership get so monopolistic. This endangers the fabric of communities.

I have noticed that supermarkets in malls are quieter than those in convenience centres.

I wish I had an account with one of these companies so that I could refuse to pay!

And what about their suppliers, are they going to pay them?

The very same CEO at Pepkor who just gave himself FREE shares, has instituted legal claims against others for loans they took to buy shares prior to Steinhoff buy-out.

The loans are illegal ….. not a registered credit provider, case will be heard in August in the W C H Court….

This will cost Pepkor more pain as there is a R550 million liability in this matter, not to mention the legal costs that Pepkor will incur.

Bottom line is that micro “mom & pop” stores (most with a turnover of under R5m/yr) cannot pay any rent while under lock-down conditions – this is non negotiable and Landlords need to understand this.

Strange that the arrogance has gone out of DE KLERK’S, voice and now looking for sympathy after killing retailers for years. In his interview the arrogance was blatant even when asked if a more humane approach was not advisable. Maybe a fwd approach would have been advisable. Cut rent by 50% for next 6-9 months and then revise, yet they waited until it hit them. The trouble will really only become apparent end April, March was still the honeymoon period.

There is legal consensus in South Africa now (amongst the leading law firms) that commercial tenants do not need to pay rent during the lockdown period (i.e. where beneficial occupation cannot be provided). This relies on the supervening impossibility doctrine in South African law pertaining to leases, with the forced lockdown being the supervening event making beneficial occupation impossible. For a landlord to enforce the payment of rental without deduction or set-off in instances where beneficial occupation cannot be provided would be against the public policy doctrine in law.

The relationship between a tenant and a landlord is a legal commercial relationship. And the law needs to be followed. It’s as simple as that.

Comments with regard to their creditors (suppliers) or debtors (customers) are not legally correct. These debts relate to services and products rendered prior to the forced lockdown (i.e. supervening impossibility). Legally, creditors will still need to be paid and debtors will still need to pay.

So seems many landlords did not price the event into their reserves?

No wonder the PIG’s are assembling now trying to “talk” to tenants.

Rudyard: there is legal consensus around one desk within ENS. I have seen several dissenting opinions and they are local, experienced lawyers.

As you presumably know quite well, taking this to court will take much more time and many times more money than a 6 month interest free repayment agreement on April rent would have involved. Roughly R2m per R100m rent if the landlord swallowed it all. 100 billable hours? That agreement could have been a 30 minute negotiation among adults if there are no lawyers in the room.

Now : thousands of billable hours and a lifetime of relationships destroyed. If I were a landlord of TFG or Pepkor you can bank that they will get NOTHING from me ever again. TFG paid one single executive almost R50m last year!

Johan: I wasn’t referring to ENS. The 3 legal opinions that I’ve seen have all been from law firms that only service the commercial property sector. Many retailers have also seen this internal comms.

There won’t be thousands of billable hours. Property groups not in that position. They’re going to risk non-payment of rent PLUS massive legal costs? And if they did, as a retailer you just need one precedent-setting case here.

TFG (1), Edcon (2), and Pepkor (3) are GP’s top 3 retail tenants by gross rental contribution. You as a landlord are going to risk the next 10 years’ rent on 3 months’ legal non-payment (assuming max lockdown until 26 June as indicated by Gov)?

GP paid one single exec almost R35m last year. Not sure what your point re exec pay is?

Rudyard:

The retailers that ran for the fire exits should take note, as a judge would, of the retailers that did not.

The boards of these retailers are being incredibly stupid to follow this route when a calm negotiation would have caused far less harm. Giving a 6 month interest free payment plan amounts to R2 per R100 if landlord swallows all of it. If you add in gainshare on subsequent revenue this was a 1% of one month issue that has now blown up to a Zuma drama.

Why should a laid-off factory worker pay TFG when they have the same argument as why TFG did not pay their rent? I would venture those repayments are FAR more than 1% of one month rental. I hope those consumers follow the legal advice of TFG and Pepkor.

I am not a retail landlord but if I were those retailers would have a hard time for the duration of their leases clause 42.3.a(ii) says your will XYZ. and on expiry – let’s see what happens. Business is about partnerships not lawyering. Retail owners get that. Property owners get that. The hired help and their assorted paid professionals are spectators that took over the whistle.

Yes I need to chill, but I am really g-vol of this entitlement without consequence game. Life is a chain – you break one part …

No payment with these cash reserves and executive payments = lack of fairness. Vacate and find alternative space. What happens when you jobless customers apply same principle. Irresponsible executive behaivour.

A solution to save jobs and the economy?

Introduce a two month debt and obligation freeze across the whole economy. That means no salaries, rent, rates and taxes and accounts are paid across the whole economy. If you do not get a salary, it does not matter as you have nothing to pay except food. The poor can get a R1 000 a month from government.

It is already happening anyway – the retail chains do not want to pay, which is unfair to the landlords and their banks and employees, unless they do not have to pay either.

It does not make sense to prevent businesses and people from working – and then expect them to pay.

End of comments.

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