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How can QSRs best seek rent relief amidst COVID-19?

Executives suggest a holistic approach in recovery.

Leasing arrangements are expected to change in the next few months due to the COVID-19 pandemic, even as questions on how retailers and landlords seek mutually beneficial solutions amidst this time of uncertainty continue to mount.

Lauding the National Cabinet’s mandatory code of conduct for COVID-19 impacted small to medium enterprises, Foodco managing director Serge Infanti anticipates that such short-term changes to leasing structures will result from a “willingness” between lessors and retailers to work “collaboratively and constructively.”

“My view on this is that most lessors will sit down and work out – whether it’s within the boundaries of the Code or within the requirements of the retailer – a situation that gets through the next three to six months. Structures will change and I don’t think…the conditions of the Code are going to be relevant in every situation, I think there’s going to be some flexibility around retailers,” he said.

Most landlords Infanti has spoken to, he said, have indicated a desire to “keep doors open and to return the shopping malls where they were” prior to COVID-19.

“So the feeling I’m getting from most lessors is that they’re open to discussions on what’s the most appropriate mechanism – the most appropriate formula to apply to retailers, whether it’s as per the code or as per the specific needs of a retailer,” he explained.

Infanti expressed his concerns over the Code’s deferred rent provision, explaining that it needs to be integrated in an ongoing lease instead of a repayment plan.

“Prior to COVID-19, we were in a pretty depressed retail environment anyway and that leases based on supply and demand were starting to change. So there were terms that we were able to negotiate even pre-COVID, which were different to what was around maybe five or 10 years ago, so there can be some changes in the way that leases are,” he said.

He also disagreed with sentiments about percentages rent being a way forward indefinitely.

“It may well be a solution in the short term but ultimately the supply and demand will dictate terms and lessor will be keen to set base rentals as a base for valuation,” he added.

Calling for a “fair-basis” form of rent, San Churro CEO Giro Maurici said the code was “encouraging”, but lamented how the whole situation has placed them in an “uncomfortable position”, being in between their franchisees and landlords in dealing with rent issues.

“On one hand, I’ve got loyalty to my franchise partners who we need to support and coach and guide through this crisis. But the reality is that they simply can’t afford to sustain those rents at current levels, as we could all imagine,” he said.

“When I get letters from landlords [and their] lawyers, citing the lowest common denominator interpretation [of the code], it leaves us as a franchisor in quite a vulnerable position.”

Franchise Council of Australia CEO Mary Aldred said there is “a bit of confusion” regarding eligibility in the code’s provisions, as some may be held by franchisors who do not fit in the government’s JobKeeper programme.

The code, subject to per-state legislations, stated that tenants with an annual turnover of up to $50 million are eligible for the code’s provisions, which include “proportionate reductions” from landlords.

“Franchisees who might be captured under a head lease by the franchisor who are seeking rent reduction from themselves will not be able to derive the same benefit under the corresponding head lease. So it’s a pretty significant business risk at the moment which we’re working through,” she said, understanding that the code pertained to group turnover.

Aside from raising this concern to the state government level, Aldred said the FCA is also working with the National Retailers Association, the Australian Hotels Association and the Pharmacy Guild of Australia to put forward an application to the Australian Competition and Consumer Commission on an exemption on collective bargaining.

Aldred stressed that there is a “very strong” regulatory and compliance framework attached to the code in order to ensure that rent relief is properly passed by franchisors to its franchisees.

Aldred also lauded the ACCC’s judgment to allow current and former members of the Australian Retailers Association to collectively bargain with landlords.

“It’s a good move…I think it’s better when a number of bodies can work together on these issues rather than inundating the ACCC with multiple applications. And the good thing about our application is that […] if the ACCC accepts our application, it will cover all of them and our member businesses,” she said.

Binding mediation, explained
When landlords and tenants cannot reach agreement on leasing arrangements as a direct result of the COVID-19 pandemic, either party is told by the code to refer it to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.

Australian Retail Lease Management chief executive Stephen Spring stressed that in order for a mediation to be successful, both parties must act in good faith.

“The mediation process cannot be used in a court of law if the parties cannot settle the differences at that time. The most important thing is that you’ve got to go in there prepared. You don’t go in there just saying ‘I want this and this is what I’m after’ with a landlord saying, ‘I want this and this is what I’m after’. There’s a logical step process,” he explained.

In his experience, Spring says about 85% of parties involved in mediations reach an agreement but remains unsure how it will turn out amidst the pandemic.

“Normally, what a mediator does is [have] bullet points of all the important points and tries to find some common agreement. If there is no agreement, the next step is a certificate of failed mediation, and then people are going to go off to tribunals and courts and all the rest of it,” he explained. “Each party doesn’t get what they want in total, but they get what they can probably live with.”

Spring also sees binding mediation as a potential option for franchisees that have increased their outgoings dramatically, provided it reaches a “significant” amount.

“If we’re talking about relatively small amounts of money in the overall scheme of things, it should be something that should be negotiable with the landlord,” he said.

When to ask for a potential exit strategy
Asked about businesses that were not financially viable prior to COVID-19, have high occupancy costs and are now paying deferred rent, Infanti advised franchisees or fellow franchisors to discuss with landlords about a potential exit strategy.

“The deferment of the rent will essentially be the nail in the coffin for you. There is an obligation to maintain commitment to the lease and the Prime Minister made that very clear when announcing the principles – both parties are to maintain the existing lease,” he said.

“I would suggest that the best way to do it is simply sit down with the tenant or the landlord, work out a commercial solution that you can live with and then, if you need to, proceed to mediation to see if you can resolve it. But the reality is, you are bound by a lease and you probably need to commercially negotiate your way out of that.”

On the level of documentation needed by landlords, Spring advised that a business’ JobKeeper number is the starting point.

“If it turns out that the business is not viable and you have to show profit and loss reports and your cash flow forecasts as an exit strategy – yes, that’s okay. You can do that as a separate exercise,” he said. “Anything else like assets and liabilities and other things that they asked for…and not necessary at this stage.”

Balance of power in lease negotiations
Maurici, meanwhile, expressed that the balance of power in lease negotiations might swing to the franchisor in some circumstances.

“If you’re a landlord in a shopping center, you don’t want to see a plethora of vacancies; you want to be able to still provide that experience to your customers. It’s just prudent for a landlord to want to keep a tenancy with the lights on, so in turn that will give us some power in the discussion which we wouldn’t have otherwise had,” he said.

Coupling long-term and short-term measures
Asked whether long-term total business viability is more important than short-term measures, Aldred said both go hand in hand.

“For example, just reopening dining in the next couple of weeks is not enough in and of itself. It needs to be staged, I think, with a return to work and reopening in states that are affected [by school closures] because if kids are still home, it’s difficult for working parents to return to work,” she said, adding that dining facilities will have difficulty in reopening and expecting customers when parents are not returning to their work spaces.

“We’re very clearly pivoting from those restrictions and hibernation into the recovery phase. But I think that’s going to take months and years ahead to fully get back to a healthy level of business for everybody,” she added.

Local marketing, local travel
Expecting that social distancing would persist for up to 12 months, Infanti expects the food & beverage, hospitality and entertainment sectors to have a faster rate of recovery. Sustainability, a key issue that Foodco has been very vocal about, will also remain as a “key focus”, along with the need to rebuild consumer confidence in local communities.

“Retailers need to be ahead of the game in this, mak(ing) sure that they’ve covered all the aspects of social distancing, and communicate that to the consumer. Make sure the consumer feels comfortable coming into their environment. Make sure that communication with staff is clear and concise as to what’s required in this area,” he said.

“For my team, we’re spending a lot of time on local area marketing, making sure our social media is up to scratch and in ensuring that our consumers are aware that we are taking the necessary steps to rebuild that confidence.”

Echoing Infanti’s take, Maurici anticipates a significant migration away from shopping centres to local strips and digital channels after the pandemic, a transition may be further prompted by a resurgence in local travel.

“The reality is that most of our strip sites have far better accessibility and proximity to the customer bases,” he said.

Editor’s Note: Insights from Aldred, Infanti, Maurici and Spring came a panel discussion, moderated by LeaseInfo founder and CEO Simon Fonteyn, during QSR Media’s Rent Relief for QSRs During COVID-19 and Afterwards webinar last 7 May. Watch the full webinar  at https://youtu.be/VHFZj6W5t4I

 

 

CAN YOU HEAR THE DISTANT SCREAMS OF SME FAILURES?

For those in retail and retail property in early 1990’s, there was this gradual, uneasy feeling that things weren’t so great as the months rolled by. The excitement of the Bicentennial was behind us, and then came “…the recession we had to have.” Interest rates skyrocketed, people slowly stopped spending and international banks pulled the pin on shopping centres and retailers alike. Leases and rents became the number one issue for many retailers as they struggled to keep shops open with reduced staff. 

Many retailers failed, as did quite a few property groups. But that belied the human cost. The failed marriages when homes were sold up to pay for the failed small businesses. The family breakdowns with some shop keepers sleeping in their shops simply to stay away from trauma at home. For those of us around back then, we heard about more than the occasional suicide, when it all got too much for some small operators. But the industry didn’t talk about that. The real pain was hidden behind confidentiality agreements. Business is business.

As a reaction, over the next few years, we saw the introduction or updated various State based retail leases laws (because voluntary codes of conduct hadn’t work), we saw law reforms come from the pain of the Fair-Trading Inquiry and despite the Productivity Commission’s Report into the Market for Retail Tenancies, we saw occupancy cost ratios climb and climb…and climb…and climb. Anyone who uses retail industry data knows only too well the old paper and plastic JHD reports seem kind of warm, fuzzy and ye-olde world; a time when when occupancy cost ratios were barely teenagers and URBIS data wasn’t on-line.

At the same time, we witnessed shopping centre space massively expand as retail became more specialised (Tie Rack, Body Shop, Kenny’s Cardiology and the like), superfunds poured money into the sector, retail franchising became popular and we saw a slow, gradual change in shopping centre cap rates. Consumers changed too with the café culture, greater tourism and an overall acceptance that being a foodie was OK. 

In the last decades, we’ve seen the introduction of overseas retailers, yet just as many have pulled out of Australia with the failure of their overseas parent companies. Sometimes the failures have been due to social change, other times the digital economy and other times just basic, bad mistakes and an occasional blip like a GFC. In more recent times, we’ve witnessed the collapse of many more: –

2016 – Dick Smith (393 stores) Laura Ashley (25 stores) Revolution Brands (Jeep Apparel) (20 stores) Meredith & Moore (19 stores) Earthborn (10 stores) Rodney Clark and Gordon Smith (15 stores) Eagle Boys Pizza (127 stores) Far Pavilions (9 stores) Willow, Seduce (10 stores) Masters Hardware (liquidates) (81 stores) Pumpkin Patch (160 stores) Payless Shoes (131 stores) American Apparel (exits Australia 3 stores) Pie Face (2.0) (39 stores) Howard’s Storage World (59 stores 

2017 – Herringbone, Rhodes & Beckett (29 stores) Marcs, David Lawrence (63 stores) Allphones (25 stores) Victoria Station and Kate Hill (64 stores) Topshop Australia (24 stores) Sumosalad (12-14 stores) Bubs Baby Shops Gap (exits Australia 6 stores) Moss River (11 stores) Forever 21 (exits Australia 3 stores) Oroton Group (listed), 60 stores

2018 – NQR discount groceries (18 stores) Maggie T (28 stores) John’s Nuts (5 stores) Outdoor Furniture Specialists (27 stores) Zachary (5 stores) Doughnut Time (23 stores) Jamie Oliver’s (6 restaurants) Baby Bounce (12 stores) Red Lea Chickens (22 stores) Toys ‘R’ Us, Babies ‘R’ Us (44 stores) Esprit (exits Australia 29 stores) Oliver Brown (50 stores) Metalicus (12 stores) Allans Billy Hyde (2 stores) Cobbler Plus, Watch Works (114 stores) Shoes of Prey, Zumbo Tasman Butchers (17 stores) Max Brenner (37 stores) Roger David (57 stores) About Life (8 stores) Laura Ashley (18 stores) Kambo’s, Liebe + Haus (7 stores) Thrive (9 stores)

2019 – Napoleon Perdis (56 stores) Ed Harry (87 stores) Build-A-Bear (30 stores) Focus Group (38 stores) Debenhams (exits Australia 1 store) Ziera, (23 stores), Karen Millen (7 stores) Sunstate Foods (Red Rooster 7 stores) Dimmeys (30 stores) Co-op and Curious Planet (34 stores) Bardot (72 stores) Critini’s Pizza (13 stores) Harris Scarfe department stores (66 stores)

Then came a virus. COVID-19. A pandemic.

What will it be like this time around?

On 7 April 2020, the PM announced an enforceable Code of Conduct for Commercial and Retail tenancies resulting from the COVID-19 pandemic. Over the past few weeks, the States have incorporated the Code into the local State legislative framework. 

Such is the damage the virus has inflicted on the economy; the Code is strongly tied to the national JobKeeper program with an unprecedented Government stimulus package. Protections given under the Code apply to small and medium businesses suffering financial stress or hardship, requiring revenue drops of at least 30% as a result of the COVID-19 pandemic. If a tenant does not meet that threshold and is still affected, other State regulations might apply, still requiring the parties to meet and discuss tenancy arrangements. Then comes compulsory mediation and hopefully all the talking avoids a full blown Tribunal or Court case.

This time around, its all about protecting the small end of town, the mum and dad shops, the small chains, the food court operators, the one-off fashion labels and the thousands of other small shopkeepers that turn their key to open their shop door every morning. These are the tens of thousands of retailers who employ our sons, our daughters, serve us food, dress us up, cut our hair, dry clean our clothes and keep our high streets from becoming urban waste lands and our suburbs food desserts. They keep our shopping centres different, they break up the endless bland, sameness that’s so much a feature of many of our shopping centres. In fact, they are the lifeblood of the shopping centres industry making up at least 80% by number of tenants and 50% by number of premises according to one report.

So what’s the overarching principles of the Code? Landlords and tenants are required to negotiate in good faith and agree to a proportional share of rent reductions or discuss new arrangements and sign documents to finalise the deal. Will everyone really do that?

Tenants often feel vulnerable in these stressful and uncertain times and many have no money for guidance to avoid costly mistakes. The negotiation process requires landlords and tenants exchange confidential information including turnover figures and landlord’s benefits received from bankers or other assistance concessions such as land tax. But we are already witnessing some landlords and agents demand tenants sign one-way confidentiality agreements as a pre-condition to starting lease negotiations. These people demand documents such as years of BAS, JobKeeper applications, personal and business tax records, bank statements, profit & loss, balance sheets, assets and liabilities of directors and cash on hand and superannuation details. Some agents request details of all Government assistance given to the lessee and are asking when that paid, when can they have it to settle rent debts? Good faith? Nothing in the Code requires disclosure of the kind, breadth and scope of the request these landlords make. The power imbalance is very easily abused.

Maybe I’m just a hardened up old bastard with way too many lease disputes under my belt, but I still recall having to look away one time as tears welled up in eyes of everyone in the mediation room as the confidential settlement paper was signed after 12 hours negotiating. The person on the end of the phone instructing the centre manager was adamant. The redevelopment works (external to the centre) had some impact, but he wasn’t taking all the blame or the loss. It impacted them both.

The lessee’s assets had to be sold to pay for most of the accumulated rent debt, with some of the balance taken for the de-fit and the fit-out claw backs. The tenant sat there, bawling her eyes out whilst the centre manager said to her, “Don’t take it personally.” It was either that or fight it out at the Tribunal with little to work with. I recall her home unit wasn’t sold immediately, however the bank guarantee was drawn down and the caveat on the modest family unit wasn’t lifted until the settlement cheques had been cashed. But the small family had split up under the strain.

In some ways, it wasn’t the harshest result I’ve seen, she signed the documents prior to entering into the lease and that’s a risk. The centre knew there was some works in the pipeline and had disclosed it. But, in other ways, it’s cruel. I can take and understand both sides. Business is business. Similar things happen to farmers in droughts, small business is risky and life’s not always fair. The file was put away for the archives.

A couple of years later, I was in Noosa and by chance bumped into her ex-husband. We chatted a couple minutes. It had been years since that financial trauma. He had rebuilt his life, he avoided bankruptcy as did the ex-wife. Their young son was just past teenage and living overseas.

And her?

She was one of the ones the industry doesn’t like to talk about.

https://coronavirus.beyondblue.org.au

 

Colette judgement opens door for more retail rent freezes

INSIDE RETAILING

April 15, 2020  Dean Blake

On Monday, the Federal Court made a ruling that collapsed fashion retailer Colette by Colette Hayman will not need to pay $648,923 owing in rent due to the extraordinary position it finds itself in.

Colette administrators Deloitte initially requested a 100 per cent rent reduction from landlords, and were offered 9 per cent.

The administrators argued to the court that due to the extraordinary position they find themselves in they should not be personally liable for ongoing rent, and not pay any rent, as doing so would deplete Colette Group’s resources and limit the benefit from a future sale as a going concern.

According to Judge Markovic, Deloitte is right and will not pay rent on 93 Colette stores due between the 1st and 14th of April.

“The administrators find themselves operating the Colette Group in an ever-changing environment brought about entirely by external factors,” Judge Markovic said.

“They need to be agile and able to react to the interests of stakeholders. One of these groups is of course the creditors of the Colette Group.

“When this application was viewed in that light, it was clear to me that making the orders sought [were] in the interests of the creditors of the Colette Group as a whole.”

However, the judgement raises questions about what is considered an ‘extraordinary’ circumstance in the current retail environment – with many retailers seeing the same conditions and difficulties as Colette Group.

According to Stephen Spring, chief executive of Australian Retail Lease Management, this judgement could be a disaster for landlords.

“The decision sheds some light on the way the Courts may interpret lease and rent liability generally in the COVID-19 pandemic,” Spring told Inside Retail.

“Whilst there have been temporary changes to director’s liabilities under insolvent trading laws as a result of the COVID-19 pandemic, many directors of companies that lease retail spaces are in the same invidious position.”

And with the decision now handed down, Spring is interested to see how it will affect businesses seeking rent reductions in future – especially those that have not appointed administrators.

According to Spring, many centre managers are asking small-to-medium businesses for extremely detailed financial information as to cash, assets and liabilities – despite landlords already knowing turnover figures that readily show the extent of the downturn.

The issue is further complicated by the Federal Government’s commercial rent solution addressing a portion of rents payable equal to the percentage of a business’s revenue lost.

Many businesses have seen upwards of 70 per cent of their revenue vanish, with physical spaces closing by government decree or in the interest of public health, and online sales only able to recoup so much of lost earnings.

The matter will be back in court on Wednesday 15 April.

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Do I pay rent if I’m forced to close due to Coronavirus?

May the “force majeure” be with you

Charles Dickens wrote, “It was the best of times, it was the worst of times…” and as coronavirus spreads around the globe, international authorities are forcing the closure of local schools, shops, restaurants and sporting events. Some chains are shutting up shop of their own volition. Obviously, potential customers to those local businesses will have virtually dried up after too long.

As we move into unchartered territory, Australian retail might well face the same trading restrictions, an added burden to the recent collapse of numerous retail chains to add to recent bushfire related problems. With shrinking profits and low cashflow, the one thing that’s keeping many of the smaller retailers awake at night is: “What happens to my rent if I am forced to close the doors?” Many small businesses simply don’t have the cash to pay overheads without income and cannot stretch creditor payments and taxes in the event of a lengthy shutdown. A global pandemic isn’t often thought about when leasing shops, but when business interruption insurance won’t provide cover, a force majeure clause in a lease (or not) might bring out both the best and worst in Australian retailers and their landlords.

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Rental Torment

STRUGGLING small retailers liken it to a giant impenetrable wall of silence, conveniently built around them to suppress their plight. They dare not speak out for fear their lease will be ripped in half. Many have in fact signed confidentiality agreements preventing them from doing so. They are trapped and their businesses are falling in a heap under the weight of the biggest burden in the game..

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Delving deeper into the leasing contract…

Stephen Spring delves deeper into the leasing contract, and the rights and obligations of tenant and landlord under a lease agreement

Yes, leases can be boring, but for most retailers, a lease is probably the most important document they posses. They can appear complicated and hard to read, but all leases are based on the same principle—a tenant has use of a specific piece of land or building for a fixed period of time in exchange for a fee commonly known as rent. It’s that simple.

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NSW lease law gives retailers more certainty

The passing of the NSW Retail Leases Amendment Act 2005 in state parliament should give retailers and their landlords more certainty about their rights and obligations under a retail lease.

Despite a last-minute proposal by the opposition – rejected along party lines – that would have given sitting tenants an automatic right to a market review if they considered the rent above market rates when their landlords elected to renew the lease, the passage of the legislation was never really in doubt….

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Look Before You Lease

The lease on any business premises can mean the difference between success and failure.

So says Stephen Spring of Australian Retail Lease Management who believes the lease is just as important as the location, particularly for retailers.

He says that new leasing laws make it imperative to get professional advice before signing, as he explains to Heather Dawson.

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Demolition Notices

Some ambiguity existed around the notion of a ‘genuine proposal’. Could a landlord serve a demolition notice to remove you for a “better” tenant willing to pay more rent for your shop? In a case where we were successful in the first instance, the landlord successfully appealed. Wynne Avenue Property Pty Ltd v MJHQ Pty Ltd provides some clarity.

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Sales and turnover information

Sales information is an important tool where collected, Productivity Commisison…

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