Feature Stories | Apr 20 2020
The government has enacted a Code of Conduct regarding landlord rent relief for SMEs, while large tenants are in negotiations, all of which will impact on REIT valuations and distributions.
-Code of Conduct enforces rent waivers
-Retail REITs hardest hit
-Office under pressure, industrial less so
-Pubs well positioned
-Another hit for insurers
By Greg Peel
Late in March, retailer Premier Investments ((PMV)), owner of brands including Just Jeans, Jay Jays, Jacqui E, Portmans, Dotti, Peter Alexander and Smiggle, informed investors that due to the lockdowns, it would close all of its 1200-odd stores worldwide and stand down all of its 9000 staff, barring a handful of head office staff, at least until April 22. Executives would work from home.
The company also told investors it would not be paying any rent on those stores during the closure period. While this seemed like a bold move, some 70% of Premier’s store leases either expire this year or are in holdover, providing the company with “extraordinary” flexibility come lease renegotiations during the crisis.
In response, Scentre Group chief executive Peter Allen said he was "surprised" to see Premier announce a shutdown, saying it was "premature" while the government was still working through options for workers, the Fairfax press reported. Scentre holds 219 Premier stores in its portfolio.
"There is a legal obligation to pay rent even if the stores close and that legal obligation means we must engage in commercial discussions with our tenants," Mr Allen said.
Premier Investments was not the last retailer to announce a pre-emptive suspension of rent payments.
The government has since settled on its JobKeeper and JobSeeker relief schemes, albeit they appear to remain fluid as overlooked worker subsets make themselves known, and had flagged action on rent relief pending getting this immediate worker support established.
One might ponder a scenario in which the government were not to intervene, leaving landlords and tenants to argue over rents themselves, even at the housing level. It would not be a simple matter of evicting the retailer who can’t cover the rent, or the housing tenant who had lost his/her job, because with all non-essential retail shut down and the sheer extent of job losses across all industries, who might the landlord find to replace those tenants in the meantime?
At the very least, heavily discounted rents might need to be offered, when prior to the shutdowns, that tenant was a valued, reliable rent payer. Thus while it is clearly in the interest of tenants not to pay rent at this time, it is also in the interest of landlords to come to some arrangement both parties can cope with until the smoke clears.
At the big end of town, retailers like Premier Investments and landlords like Scentre Group can negotiate such arrangements, but smaller retailers don’t necessarily have the clout. Hence the government last week announced a Code of Conduct on Small & Medium Enterprises Commercial Leasing Principles, to be used as a benchmark.
The Code was not simply cooked up by the federal cabinet or national cabinet but was developed by parties on both sides of the argument, being the Australian Retailers Association, the National Retailers Association, and the Pharmacy Guild of Australia in the red corner, and the Shopping Centre Council of Australia in the blue corner, which is chaired by none other than Scentre Group CEO Peter Allen.
The Code sets out fourteen principles to guide the dealings between landlords and SME tenants across all of retail, office and industrial properties which have lost business as a result of the pandemic, and are participating in the government’s JobKeeper program, which provides wage assistance to companies if those companies retain idled workers.
These are principles, not laws, although landlords cannot evict their tenants and tenants must honour their leases, meaning they can’t just walk away.
The Code does not preclude any landlord negotiating its own bespoke deal, satisfactory to the tenant, to account for specific circumstances. The government also expects Australia’s banks and other financial institutions to play their part in providing flexibility to both parties.
The Code directs landlords to offer rent reductions in proportion to the loss of trade suffered by the tenant during the shutdown period and in line with a reasonable subsequent recovery period. Reduction amounts can be a mix of rent waivers and rent deferrals but full waivers must make up a minimum of 50% of reductions, and the lease may be extended by the duration of waivers and deferrals.
Thus if a retailer, for example, has lost -80% of its turnover in the shutdown, the landlord must reduce the rent by -80%, made up of at least 40% fully waived and the balance deferred to a later date that allows a reasonable period for that retailer to be back towards “normal” business.
The tenant must have had a prior turnover of less than $50m annually and must be eligible for the JobKeeper scheme, which means only those businesses having seen a -30% fall in revenue or more.
As noted, it’s up to the bigger end of town to fight its own battles.