On Tuesday, 7 April 2020, the newly formed Property Industry Group (“the PIG”) announced an industry-wide assistance and relief package for retail tenants as a response to the 21-day nationwide Covid-19 lockdown imposed by our President from midnight 26 March 2020.

The retail sector trading in non-essential goods has been one of the hardest hit by the lockdown regulations and prohibitions. This relief package is a collective response from the three major representative bodies for commercial real estate landlords – namely South African Real Estate Investment Trust Association (“SA REIT”), the South African Property Owners Association (“SAPOA”) and South African Council of Shopping Centres (SACSC) – which aims to assist  those SMMEs who are unable to pay their rental as a direct result of the lockdown procedures.

Over the past few weeks, hundreds of small retail businesses as well as several of SA’s major retail tenants, including The Foschini Group, Pepkor and KFC, announced their inability to pay rental during the lockdown period. Ordinarily, the coming together of landlords to discuss topics such as the fixing of prices, rental discounts and payment holidays, may constitute prohibited vertical or horizontal practices for the purpose of sections 4 and 5 of the Competition Act 89 of 1998 (“the Act”). The PIG  was formed in response to the needs of retail tenants and after the Minister of Trade and Industry published regulations (see the regulations here) to exempt the agreements or practices from the application of the relevant provisions of the Act where such conduct is undertaken at the request of and in coordination with the DTI.

The PIG’s announcement is a much-needed response for those in the retail sector (which contributes significantly to our economy and job creation). The harsh impacts of the lockdown are not unique to the commercial real estate industry; however, it is one of the first major industries to come out and publicly offer discounts and relief to its tenants. We have already seen debt relief support from the Minister of Small Business Development, debt restructuring options facilitated by Small Enterprise Finance Agency (SEFA) and other governmental funding facilities. Big corporates in other industries will have to step up to the mark and be proactive in ensuring the survival of our economy in the wake of the lockdown period.

The group announced that, in order to qualify for any of the relief benefits, retail tenants will have to undertake to not retrench staff during the lockdown. The relief period will only apply for the current 21-day lockdown and will provide relief for the months of April and May 2020. Should the lockdown be extended beyond this period, Government and banking sector relief measures, including those donation funds such as the Solidarity Fund, should be considered for assistance.  The hope is that by then, any teething problems initially experienced by these schemes at their inception will have been sorted out and these public and private economic support measures can step in to provide support.

 

Not a get-out-of-jail-free card

This benefit package is not a get-out-of-jail-free card for every SA retailer. Those retailers trading in essential goods – many of whom continue to trade as normal during the lockdown – are not entitled to this relief.

The relief package will focus on those retailers in the non-essential services sector and will provide the most support to SMMEs retailers with an annual turnover of less than R80 million. Less support will be given to retailers that have insurance cover or other sources of relief in order to focus these benefits on those who have nowhere else to turn.

The extent of the relief will depend on the severity of the impact that the lockdown has had on the retailer specifically: non-essential retailers prevented from trading who were in good standing at the end of February 2020 will be offered this financial assistance from their landlords.

According to the PIG:

  • Landlords will assess and consider the tenant’s financial position and strength of balance sheet to classify in an impact category
  • Landlords will have flexibility and discretion, on a case-by-case basis, to adjust parameters; however, minimums are set as the base guideline.
  • Normal or better trading will be assessed considering rent-to-sales ratios, balance sheet, stock availability, etc.

In extreme cases, a 100% relief of rental will be offered, but for the most part, the relief will come in the form of a either a full or partial waiver of rental, or interest-free deferments of rental which will be recovered over a six to nine-month period. It is important to note that, for the purpose of the PIG’s relief package, rental includes rent, operating costs and parking rental, however, it excludes insurance as well as all rates and taxes recoveries and utility cost recoveries.

The PIG’s relief package is detailed as follows:

SMME RETAILERS (categorised by the DTI as having annual turnover of up to R80 million)

Category Basic assistance and relief Interest-free deferment recovery period
Level 1: Highly impacted retailers (e.g. companies selling time and services such as restaurants, hairdressers, travel agents, take-aways, etc.) April 2020

·        35% to 100% of April 2020 rental and further potential relief could be in the form of rental deferments

May 2020

·        up to 50% of May 2020 rental and further relief could be in the form of rental deferments

Over six to nine months from 1 July 2020
Level 2: Medium impacted retailers (e.g. companies selling product that doesn’t have a limited shelf-life, etc.) April 2020:

·        35% to 50% rental discount and further potential relief could be in the form of rental deferments

May 2020:

·        Up to 25% rental discount and further relief could be in the form of rental deferments

Over six to nine months from 1 July 2020
·        Tenants’ financial position and strength of balance sheet to be assessed by landlord to classify in an impact category

·        Landlords have flexibility and discretion, on a case-by-case basis, to adjust parameters; however, minimums are set as the base guideline.

·        Normal or better trading assessed considering rent-to-sales ratios, balance sheet, stock availability, etc.

 

 

NON-ESSENTIAL GOODS/SERVICES

Category Basic assistance and relief Deferment recovery period
SOE and Government tenants No relief offered – 100% of rent payable (excl. temporary testing, laboratories and healthcare services housed free) N/A
All retailers with annual turnovers above R80 million (including local and international listed/publicly-traded retailers and large unlisted retailers) April 2020:

·        35% rental discount and 15% rental deferment

May 2020:

·        15% rental discount and 35% rental deferment

Over six months from 1 July 2020

 

ESSENTIAL GOODS/SERVICES

Category Basic assistance and relief Deferment recovery period
Retailers offering more than 75% essential services No relief offered – 100% of rent payable N/A
Retailers offering essential services but electing to close No relief offered – 100% of rent payable N/A
Retailers offering partial essential services, less than 75% ·        Essential goods/services – 100% of rent payable

·        Non-essential goods/services – as per retailers with annual turnovers above R80 million

Pro-rated by essential goods/services turnover vs non-essential good/services turnover (or gross lettable area if specifically agreed)

For non-essential goods/services portion: over six months from 1 July 2020

 

The PIG has noted that:

payment for rental for the month of April and May 2020 should be done by no later than the 17 of April and the 7 of May respectively and apply to all discounts and deferrals

Tenants thus have a short period of 10 days to motivate for these relief measures, and in the case of office, industrial and hospitality tenants, to negotiate rental relief with their tenants.

 

What are the legal implications of accepting relief in terms of the PIG’s package?

A tenant who accepts their landlord’s offer to provide for any of the relief which forms part of this package may be said to waive their rights to:

  1. a greater reduction percentage in rental; and / or
  2. any right to cancellation which may have arisen.

It should also be noted that any acceptance of a landlord’s offer for a remission of rental, in accordance with the PIG’s relief package, should be considered against whether or not a landlord is entitled to rental at all.

Tenants are not bound to accept these terms; however, once an election has been made, such decision is final, and any rights waived can likely not be revisited.

We would therefore urge tenants to take proper advice, and to consider the full extent of their rights before accepting any such offers from landlords.