To curb the spread of the Covid-19 pandemic only essential services such as grocery stores, medical facilities, pharmacies, fuel stations and banks can operate during the lockdown.
The Covid-19 lockdown is forcing more retailers into a position where they cannot afford to pay their rentals, which adds to the pressures being experienced by retail landlords.
The Edcon Group has announced that it can only pay workers’ salaries due to the impact of Covid-19 on sales, and now peer clothing giant the Foschini Group plans to stop rental payments as a result of the lockdown as it has had to close all of its stores in South Africa. During the lockdown the group is projecting lost turnover exceeding R800 million.
Other retailers, big and small, are also contemplating putting a stop to rental payments as business has ground to a halt. Most affected businesses include clothing, footwear and home textile retailers; personal care services such as hairdressers, health and beauty salons; and restaurants.
Non-payment of rentals could cause the collapse of malls and severely impact retail property firms. Landlords must pay rates and taxes and have operational expenses regardless of whether malls operate or not.
Landlords are understandably annoyed and frustrated and are decrying the stance of corporate tenants as “unlawful”.
The sad truth is that some national retailers are bigger businesses than the landlords.
What to do?
- Government departments have announced various measures to alleviate the economic effects of the lockdown on businesses.
- Most lease agreements require tenants to obtain, and keep in place, their own insurance for their businesses, which normally includes business interruption insurance. Tenants ought to claim against their insurance first, before refusing to pay rent.
- Parties and government should negotiate:
- Payment holidays and/or rental discounts or deferments for tenants;
- Limitations on the eviction of tenants; and
- The suspension or adjustment to lease agreement clauses that restrict the designated retail tenants from undertaking reasonable measures required to protect viability during the national disaster.
Restaurants, hairdressing salons and the like have closed for the foreseeable future and are unable to make payment of their monthly rental until the virus is contained and business returns to a semblance of normality. The same applies to service providers like solo professionals and small professional firms.
THE LEGAL ISSUES
In these uncertain times, only time will tell how the courts will react to any unilateral action taken by tenants.
As a general principle, both in terms of the common law and in terms of agreements of lease, a failure to pay full rental and operating costs on time constitutes a breach of the lease, entitling landlords to cancel the lease, claim arrear rentals and sue for damages, being the rental for the balance of the lease.
Those smaller businesses that have had to close their doors must still pay their rental and utilities as most lease agreements contain clauses limiting the landlord’s liability. At law (and as unfair as this may seem) a tenant is unlikely have a right to claim a reduction of rental or the right to withhold the payment of the rental, nor would the tenant have a claim for damages for loss of earnings.
The lease will contain a clause that peremptorily stipulates that unless otherwise provided in terms of law, all amounts payable in terms of the agreement shall be payable by the tenant to the landlord free of deduction, exchange and/or set off.
Leases generally only give you the right to stop or reduce the amount of rent and outgoings you are paying if you cannot access or use your premises because they are damaged or destroyed, and not because of the pandemic.
If a lease becomes impossible to perform because of COVID-19, the tenant may be able to argue that the lease has been frustrated and should be ended.
Some tenants choose not to contact their landlords and elect simply not to pay their rental (whether they can afford to or not). When law firms and the courts re-open we will see a huge number of demands for payment and summonses being issued. The courts will have to decide what rights the tenants may have had, not to pay rental as a result of the lockdown.
Other, perhaps more sensible tenants will approach their landlords to arrange temporary payment holidays or deferments of rental. If they can, they should at least pay their share of the common operating costs. They must certainly check whether their insurance policy makes provision for Business Interruption and claim on the policy.
Some lease agreements contain a force majeure clause (an act of God clause to protect the parties if a segment of the contract cannot be performed due to causes that are outside the control of the parties, such as natural disasters). Such a clause may absolve one or both parties to a contract of all or part performance of their obligations on the occurrence of certain events which are outside their control.
If a lease has such a clause, it is possible that a tenant can argue that the COVID-19 pandemic falls within the contract wording, and that non-performance has been a result of the outbreak.
Despite the fact that a tenant is not in full occupation of the premises and will not generate an income, there is an argument to be made that although its human resources are not in occupation of the premises, its business assets remain in the leased premises and it, accordingly, still enjoys some use and benefit of the leased premises.
Moreover, as much as this clause may assist a tenant, the landlord can also rely on the clause to assist it, in its failure/inability to provide the tenant with full use/use by its human resources, of the leased premises.
A tenant will ultimately need to prove that it was unable to pay the rental due, based on little or no turnover due to the epidemic.
Seek legal advice to see if you can or should rely on such a clause to avoid paying rental.