Lease Agreements During #COVID Lockdown – Possible Relief for Retail Rental Sector

 

developing skills in the work placeThe unfolding COVID-19 crisis will have many long-lasting and unforeseen economic impacts on the global economy. Of the many concerns is what a general 21-day lockdown will mean for business enterprises not exempted from the national lockdown. Hardest hit will be SMME’s not yet large enough to have developed long term business continuity practices and who still rely on cash flow from month-to-month.

To protect this portion of the South African economy, the legislature has begun rolling out a series of relief schemes supported by laws and regulations aimed to ease the burden on SMME’s and, as a consequence, the partition of the population they represent. One of these many regulations is the Department of Trade and Industry’s COVID-19 Block Exemption for the Retail Property Sector, 2020 (‘the Regulations’).[3]

The Regulations apply to “Retail Property Landlords” which includes a wide net of possible stakeholders who facilitate and let rentable space in the retail property sector and “South African Retail Tenants” including businesses that lease retail property and who are involved in various trades including those relating to Clothing, Footwear, Home Textiles, Personal care service and Restaurants.

These regulations are, ostensibly, designed to encourage landlords to come together and reach some form of universal agreement to ease the burden on their tenants in the retail sector. This is usually not permitted as s4 and s5 of the Competition Act, 89 of 1998 (‘the Act’), usually prohibit what can be seen as collusion or price-fixing between groups of competitors as well as suppliers and customers.[4]

The Regulations provide that s4 and s5 will not be enforceable against any ‘collusive schemes’ designed to ease the burden the lockdown will have on certain classes of Tenant. It is important to note here that the Regulations are limited to “South African Retail Tenants” involved in the sale of Clothing, Footwear, Home Textiles, Personal care services and Restaurants.

It therefore follows that these Regulations call for payment holidays, rental discounts, limitations on evictions and the adjustment of lease agreements.

What does this mean for tenants?

The legislature has removed any restriction on landlords from entering into negotiations to ease the pressure on retail tenants. However, tenants will still have to wait to find out whether landlords will begin the process as described above. The regulations simply allow for the discussion to take place and do not impose any obligations on landlords.

With that in mind, and although speculation should not be encouraged, it would seem that the legislature expects large corporations and to facilitate a process of easing the effect Lockdown will have on SMME’s. Whether landlords will take the legislature hint and begin this process is entirely uncertain. Still, it is submitted that this would certainly ease pressure on society and would allow for a longer term and sustainable business model.

Until such time that landlords commit to renegotiations, tenants must continue their obligations in terms of any commercial lease agreements. Further recourse may lie within the terms of the Consumer Protection Act 68 of 2008 (‘the CPA’). The CPA, may, in some intances, apply to lease agreements where the commercial tenant has an annual turnover or an asset value below a certain maximum threshold.

If applicable, the commercial tenant, has the option of terminating the lease agreement by providing 20 days notice and paying a reasonable penalty. A reasonable penalty has not been firmly pegged, but is commonly understood to be 2 – 3 months payment in lieu of rent. During a period of national emergency it is arguable that that which is usually considered a reasonable shifts to fit the circumstances of the parties.

For this and any other related legal needs during this time, contact an expert at SchoemanLaw Inc.

 

[3] Regulation 358 of Government Notice 43134 24 March 2020 (https://www.gov.za/documents/competition-act-coronavirus-covid-19-block-exemption-retail-property-sector-24-mar-2020)

[4] s1 of the Competition Act 89 of 1998

 

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