Landlords and large retailers locked in rental negotiations
Property funds and landlords have been locked in negotiations with large retail tenants to convince them to pay rent for the lockdown period, after TFG and Pepkor said they were within their legal rights to withhold it.
On March 24 trade & industry minister Ebrahim Patel gazetted exemptions that allow competing landlords, property companies and tenants to work together to reduce rentals or permit rental holidays in response to the lockdown.
The exemptions are designed to relax restrictions on joint agreements that would usually be considered anticompetitive, unlawful and collusive. They include a clause that allows tenants to take “reasonable measures” to protect their viability during the lockdown even if in breach of contract.
Pepkor, the owner of Ackermans, Incredible Connection, HiFi Corp, Bradlows and Pep, along with TFG, which owns more than 2,500 Markham, Foschini and @Home stores, have interpreted this gazette as allowing them to lawfully not pay rent.
But commercial property industry bodies such as the SA Property Owners Association (Sapoa) maintain it is illegal to withhold all pay, especially as store assets remain in the malls. Landlords also have to keep shopping centres open so consumers can buy groceries and medicine, and this requires paying rates, electricity and security companies.
Keillen Ndlovu, head of listed property funds at Stanlib, said the large retailers and landlords had differing legal interpretations of whether rent was required.
“We understand that landlords and major retail tenants are exchanging legal opinions. Tenants believe that they are within their rights not to pay rent and landlords believe that is unlawful.”
Referring to the negotiations between the big property and retail players, Ndlovu said: “We hope … that both parties reach some sort of middle ground.”
Estienne de Klerk, SA Reit Association chair, said negotiations were “very constructive”.
“We are in discussions with these tenants. Clearly, no rental makes no legal sense.”
Property industry groups are working on a tenant assistance and retail relief proposal, he said. This could mean rental discounts or deferred payments, De Klerk said.
De Klerk, who is also CEO of Growthpoint Properties, SA’s largest real estate company with close to R140bn of asset exposure, said details of the rental support plan would be announced later this week.
Landlords are facing multiple challenges with an oversupply of retail space, constrained consumers and the most recent rental loss from 23 Dion Wired stores being permanently shut. Landlords will be under even more pressure if about 750 Jet and Edgars stores do not reopen after the lockdown.
The head of TFG property, Brad Rothenburg, said in a statement they had taken legal advice before suspending payment.
“The decision was not taken lightly and has been guided by legal counsel.”
In a letter to landlords, Pepkor said it employed more than 56,000 people and would pay salaries before rent.
“The wellbeing of these 56,000 employees necessitates tough decisions being made.” It also said it was relying on the new regulations to suspend rent.
Pepkor’s letter said it expected weak sales when stores reopen.
Sapoa CEO Neil Gopal previously told the media it was illegal not to pay rent and he did not believe it was the government’s intention that property companies would bear the full brunt of the economic slowdown due to the lockdown.
But he would not comment because of the current negotiations.
“We will have to wait and see what the outcome is.”
Ndlovu said: “If the rent is not paid, it will be a huge challenge for retail-focused real estate investment trusts (Reits) and, even worse, for those with weak balance sheets.”
Ndlovu said banks may have no option but to relax Reits debt repayments. This could include “allowing landlords to pay lower interest in the short term due to lower rent collection”.