Author: Margeaux Malherbe – Associate
On 7 April 2020, the Property Industry Group, a newly formed collective of the country’s major commercial property representative bodies, announced mandatory relief packages for retail tenants that will suffer the greatest financial blows due to SA’s lockdown restrictions in the wake of the Covid-19 outbreak. This appears to offer welcome respite from the harsh economic effects which could result in financial ruin for many businesses. However, many questions may be raised in respect of the equity and adequacy of the relief offered, including whether it provides the tenants with the same level of relief which they may be afforded under the common law, as well as where this leaves non-retail tenants which are not accommodated by this exclusionary aid.
Background to the announcement
The announcement came after certain major tenants in South Africa, including KFC, the Foschini Group Limited and Pepkor Holdings Limited, decided to withhold rental during the lockdown due to the sharp fall in their revenues to almost zero. A contributing factor to this decision was the publication of a Government Gazette notice on 24 March 2020 by the Minister of Trade and Industry. This gazette was aimed at allowing tenants, acting collectively, to take reasonable measures to protect their financial viability as a result of the Covid-19 crisis, however it was largely misunderstood as permitting tenants to go as far as withholding rental even when it amounted to a breach of the lease agreement.
In reality, the gazette does not release tenants from their obligations under their lease agreements, but merely waives certain limitations on clauses in lease contracts which are deemed to be anti-competitive by the Competition Act 89 of 1998. The waiver allows more flexibility for landlords and tenants to agree on certain terms in their lease agreements that mitigate against the effect of the Covid-19 on the economy, and which would otherwise have been prohibited under the Competition Act. This exemption is also only applicable to a limited range of businesses, namely restaurants and retailers of clothing, footwear, home textile and personal care products.
The interpretation of this gazette coupled with the impetus of retailers all over the world demanding a reduction or waiver of their rental obligations during the lockdown, naturally posed a great risk to property owners as well as banks, due to the potentially catastrophic knock-on effect. This quickly sparked discussions between the major stakeholders in the industry, including landlords, various groups of retailers and the newly formed Property Industry Group which collectively speaks for the commercial real estate sector. The outcome of these negotiations was the decision to provide for minimum rental discounts, primarily for SMMEs, amongst other relief.
Relief packages offered by the announcement
The relief packages outlined in the announcement offer retail tenants:
Protection from eviction for April and May 2020 for all tenants in good standing as at 29 February 2020;
Minimum rental discounts for SMME retailers – having an annual turnover of no more than R80 million – of at least 35% and up to 100% for April 2020 and up to 50% for May 2020, depending on the extent of financial impact;
Rental discounts for larger retailers with an annual turnover more than R80 million, of at least 35% for April 2020 and at least 15% for May 2020; and
Interest-free rental deferments where the deferred rental will be recovered within 6 to 9 months from 1 July 2020.
No relief is offered for non-retail tenants, SOEs, Government tenants, retailers offering more than 75% essential services and retailers offering essential services but electing to close.
Adequacy of relief offered to protect tenants’ legal rights
Although the relief packages offer retail tenants mandatory minimum discounts, the ultimate extent of relief granted is left to the discretion of the landlord. This position of unequal bargaining power leaves the door open to abuse, and therefore the adequacy of the relief packages offered ought to be interrogated, especially in the case of smaller, more vulnerable retailers.
The announcement claims that the relief is “balanced and addresses some of the key issues on both sides. It is an equitable way to protect both industries…”. The question of how balanced and equitable the relief really is depends largely on whether the tenants may be entitled to a greater reduction in rental than what is offered in the relief packages should they choose the alternative option of relying on the common law.
The announcement calls for tenants to accept the offer of the relief packages as set out above instead of opting for the legal route to claim a reduction in rental. It states: “We’ve seen retailers reverting to legal positions, but we don’t believe that litigation provides either side with timeous solutions needed to get through this unprecedented time.”
It also purports to advocate for the protection of the financial interests of landlords due to the contribution made by the property industry to the economy.
While it is true that litigation can be costly and time-consuming and the relief packages seem to be a very attractive solution to the impact of the lockdown on business, tenants are encouraged to know their legal rights so that they empower themselves in negotiations and perform a cost-benefit analysis on a case-by-case basis.
What about non-retail tenants?
The rental relief packages only apply to retail tenants, which excludes office, industrial and hospitality tenants and those operating online businesses from office premises, warehouses, factories and hotels. The announcement provides that landlords will also “consider” providing relief for non-retail tenants on an ad-hoc basis, “where the lockdown severely impacted the tenant and where it is justified. These tenants will negotiate relief terms directly with their landlords.”
There is thus no guarantee of any form of rental relief to these types of tenants and, in the circumstances, all non-retail tenants have no other option than to rely on either the force majeure clause or the common law principle of supervening impossibility of performance to negotiate a reduction of rental for the duration of the lockdown period.
It is unclear why retailers are considered to be more worthy of protection than other forms of tenants, and this also raises concerns as to the equity of the application of the relief packages.
What’s next?
Due to the uncertainty of the circumstances, the relief packages announced ought to evolve with the ever-changing impacts of the pandemic and resulting lockdown, and also ensure that they are more inclusive to other forms of tenants and adequately protect the interests of both parties.
Notably, the announcement states that the relief packages, being limited to the months of April and May 2020, were based on the assumption that SA’s lockdown would only continue for 21 days and that “If this isn’t the case, it is critical for stimulus packages such as those provided by the Government, banking sector and Solidarity Fund to kick-in to weather this storm”. This suggests that no further sector-wide rental relief packages will be offered to tenants by landlords.
On 9 April, the lockdown was indeed extended until at least 1 May 2020 and accordingly any rental relief for tenants from June 2020 onwards will have to be negotiated based on the legal position of the parties. Landlords and tenants alike are encouraged to obtain sound legal advice so as to be empowered in discussions on rental relief, while also understanding that the current climate requires concerted mutual collaboration, compromise and understanding. It may be that there is alternative relief available to all categories of tenants arising either from force majeure clauses in their lease agreements or through the operation of supervening impossibility of performance, a topic we have written about recently Force-majeure during COVID lockdown in South Africa.
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