COVID-19 and commercial lease agreements – Relief measures announced
17 Apr 2020
On Tuesday, 7 April 2020 a newly formed group, the Property Industry Group ( ‘the Group’), made up of some of South Africa’s largest retail property landlords, announced the terms of a “Tenant Assistance Relief Package” (‘TARP’). The announcement and the relief offered, albeit with certain caveats, may very well protect or act as a buffer to prevent the collapse of the sector and parts of the economy. At the same time, TARP raises a variety of concerns and tenants are urged to consider their option very carefully before making any final decisions.
Overview of TARP
It’s evident that the primary goal of TARP is to protect SMME’s. The Group has made it clear that their respective tenants represent a significant portion of the economy. The Group has recognised that without any foot traffic and without being open for business, forcing a tenant to pay full rent during this time would signal a death knell.
Under usual circumstances, the scheme agreed would have been unlawful and in contravention of s4 and s5 of the Competition Act, 89 of 1998 (‘the Act’). The Groups announcement would usually be considered as collusion or price-fixing between groups of competitors as well as suppliers and customers. Additionally, the scheme would be seen to be an Act of collusion between parties sharing both vertical and horizontal relationships. A vertical relationship is that between the company, its suppliers and/or customers and a horizontal relationship is that between customers.
As more fully described in the article at this link, the Department of Trade and Industry’s COVID-19 Block Exemption for the Retail Property Sector, 2020 (‘the Regulations’) relaxed portions of the Act. As such, the Group was able to ‘collude’ and ‘conspire’ lawfully, for the benefit of their tenants and the economy.
TARP provides for certain relief measures applicable to tenants, the extent of which depends on the severity the impact that the COVID Lockdown will have on the tenant.
The Relief Offered
The Group provided that in terms of TARP for the period including April 2020 and May 2020 member landlords will allocate rental discounts consisting of either full or partial waiver of the payment of rent. The deferred rental will be recovered from the tenants for a period of six to nine months from July 2020. The discounts would not apply to rates and taxes and other costs, and payment would still be expected.
SMME’s, including qualifying companies with annual turnovers up to R80 Million, are set to benefit the most as they are the hardest hit. The relief offered to SMME’s are as follows:
- High Impacted Companies may be entitled to receive up to 100% rental deferment off of April, and 50% off of May, which amount deferred is to be paid off over six to nine months, interest-free;
- Medium Impacted Companies may receive up to 50% rental discounts and deferral off of April and up to 25% for May, which is to be paid off over six to nine months, interest-free.
The extent of the impact will be measured on a case by case basis, and each landlord will have its discretion. Some criteria will include turnover, the type of business, the extent to which each tenant can trade, and the strength of the balance sheet of each tenant.
In addition, the following are noted as essential features and caveats:
- To qualify, the tenant must undertake that it will not undergo any retrenchment process during the relief period;
- Tenants whose accounts where in good standing as at 29 February 2020 would not face evictions;
- The relief offered was proposed as the minimum tenants could expect, and certain landlords may offer deeper relief packages.
The Impact and Effect on Tenants
Although TARP will undoubtedly offer a lifeline to companies who are not able to trade for the immediate future, the mechanism being proposed will have medium-term repercussions. In the first instance, the repayment plan, although interest-free, will impact cash flow after Lockdown. How this will impact businesses, who manage to survive the Lockdown is entirely unknown. It may very well be that the measures provided, although a minimum threshold, will not be enough to ensure SMME survival.
Further, although not entirely obvious, it appears that TARP will not apply to each tenant automatically. Those who wish to make use of the measure will have to approach their landlords and begin the process of negotiating on their own accord. It is vital that each Director, owing a fiduciary duty to their companies, take careful stock of whether the decision is one which is in the best interest of the company, employees, and other stakeholders. The long-term impact of deferring rental may not be a wise decision in each and every situation.
It is important to consider what impact accepting the measures being offered will have on the lease agreement. Indeed, accepting the proposals may have a drastic effect on any right to termination, the applicability of any penalty provisions and the strength of a tenant negotiating position. Indeed, in some instances, rental may simply not be owed at all given the applicability of any common law or statutory rights.
It is crucial to consider the offer very carefully, and, if needed, take further legal advice to ensure the decision is wise. Please note that if you have any question on this or any other topic or issue, please feel free to reach out to SchoemanLaw as we are open for business during the Lockdown.
- Lease agreements during COVID lockdown – Possible relief for retail rental sector
- What are your rights within the context of COVID-19? – Free Resource Centre
- Mediation between landlords and tenants – A critical tool now?