Never thought I would be an advocate for the rule of law, but here I am promoting the sanctity of commercial transactions.
On a slightly more serious note I do see scope for a more pragmatic approach to simple turn over clauses in the post -Covid 19 apocalypse.
See my full conversation with Shaun Harris below.
SINCERE TALK NEEDED BETWEEN
LANDLORDS AND TENANTS
OTHERWISE THEY TANGLED UP IN BLUE
By Shaun Harris
9 April 2020
Dear Landlord. Please don’t put on a price on my soul.
That plaintiff cry comes from Bob Dylan on one of his early 1967 hits, Dear Landlord.
And it’s a cry being taken up by many tenants as the Covid-19 lockdown forces them to try and conserve cash and plead with landlords to give them tax relief for the lockdown period.
Some landlords have already responded positively, such as JSE-listed Spear REIT which says it will provide rental relief to some tenants as the 21-day nationwide lockdown hits non-essential retailers.
Banking consultant Simon Stockley encourages dialogue and negotiation between landlords and tenants. “New areas of cooperation between landlords and tenants, with business risk being shared between the parties, seems the best possible outcome for the future,” he says. This comes with Cosatu calling on the PIC to suspend rental payments in respect of properties it owns and where the troubled Edcon group is a tenant. “In my view this represents the same old thinking. Edcon has been struggling for years. Hard calls are going to have to be made. There’s no point in throwing good money after bad”, Stockley says.
Yet what might have started as small-time anarchy by tenants who cannot, or don’t want to pay rentals has become big-time anarchy with Pepkor stating it won’t pay retail landlords. This from South Africa’s largest non-grocery retailers with around two million square metres of retail space
countrywide. All its stores have closed for the lockdown period and therefore are not making money, in fact losing money, and it has told shopping center landlords it won’t be paying rent. With around 5 400 stores in Africa, most in South Africa, the big-name chains are Pep, Ackermans, Tekkie Town, HiFi Corp, Incredible Connection, Tiletoria and Bradlows. A letter by Pepkor CEO Leon Lourens has been sent to landlords on its decision not to pay rent for the lockdown period. Asked by website Moneyweb on this letter, it issued a terse reply: “Our agreements and negotiations with our landlords are confidential and we prefer not to comment on this in the media.
However, Pepkor adds it has invited landlords to engage with its Pepkor Properties division on “possible alternatives” to protect its viability during the national disaster and to be in a position to remain a tenant post the disaster.
Stockley has ideas on alternatives. “I call on all parties to create new and unique structures that go beyond the traditional turnover clause currently existing in many lease agreements and create bespoke structures that represent a true and meaningful sharing of risk, with for example landlords converting rentals into equity, thereby sharing upside potential.”
The TFG group has chartered the same course as Pepkor, telling landlords it won’t pay April rentals due to the lockdown. It has more than 3 000 stores globally, about 2 500 of which are in South Africa, covering more than 750 000 square metres of retail space. “The decision was not taken lightly and has been guided by legal counsel”, says Brad Rothenburg, TFG’s head of property.
However, as one reader of the big chains’ decision comments after reading about it on Moneyweb: “I wonder what TFG, Pepkor and other retailers will do if we all stop paying our accounts due to the shutdown. This sword cuts both ways.” That sounds like it could be a potential class action.
Many commentators feel the focus should be on protecting small tenants and giving them rent holidays or other assistance. They say the large chains should have sufficient cash resources to see them through this difficult period.
Withholding rental payments is having a severe effect on the JSE-listed property companies. A few years ago, this was one of the top performing sectors on the JSE. Now it is one of the worst, with some share prices down by more than 50%. These companies are required, by law, to pay 75% of their rental income as dividends. No rent is bad news for them, and partly explains the poor share price performance which has many of the companies withholding dividend payments.
The companies have approached National Treasury for financial relief.
Refusal or inability to pay rent is one area that concerns Stockley. “We can’t allow for lawlessness and such actions by tenants. This would threaten the very nature of commercial transactions. We need a radical departure from the patterns of the past, which will be necessary if we are to come out of this intact. Bold challenges demand a bold response. I am proposing a true partnership risk sharing model as a point of departure.”
Still to play out, and it will, is what the insurance industry is going to do. Many people have insurance cover against payments, like rent, not being paid. If it’s a simple case like a tenant going bust and not being able to pay rent, no problem, the insurer should pay. But when large multinationals refuse to pay rent, what then? When this happens, caused by a government imposed lock down, the industry tends to make cartel-type decisions. They won’t pay claims. Maybe they should send the bills to Pretoria and let governments pay for loss of rental income.
But back to Bob Dylan. Further down in his song he sings:
Dear Landlord
Please heed these words that I speak
I know you’ve suffered much
But in this you are not so unique
Yes. Landlords and tenants are suffering. From something beyond their control. They must stand together, talk to each other, and together, find a way forward.