Why the Future of Small Retail Shopping in South Africa is Doomed?

There is an insidious scourge in society, criminality, albeit perhaps only due to a disregard for people. An ignorance of cause-and-effect. There has been Grand-Scale COLLUSION between Landlords and Managing Agents, on the one hand, enabled, even if unknowingly by the Ministry of Trade, Industry and Competition on the other.

Collusion between these powerful Property Owners is represented by the South African Property Owners Association, SA Reit and the South African Council of Shopping Centres.

Together these three Associations have, with the Minister of Trade, Industry and Competition’s Ebrahim Patel, either wittingly or unwittingly COLLUDED to defraud and destroy the Small, Independent Tenant, and decimate Independent Retail in South Africa forever.

Their actions of COLLUSION have caused in the Retail and Commercial Property space, a circumvention of one basic principle, the most fundamental economic one of this entire Covid-19 Pandemic. The principle of “Cause and Effect” and in the process, the balance between supply and demand has been engineered to become destabilised and unilaterally unbalanced.

The idea is that for any measure taken by a Government to work, there has to be a level playing field for all. While this is generally impossible, there are some instances where that need is obvious, where it is called for and where ignoring that basic truth can be anticipated to cause irreparable harm to the most vulnerable in a precarious sector, the Small and Independent Retailer and thereby the Small and Independent Tenant.

Action to cause commercial devastation and financial ruin to one must be counter-balanced with measures to have the same effect on ALL, for the common good. If not, then as Government you create an unsustainable and unsubstantiated unilateral, one-sided demand of entitlement by the Landlord for Fixed Rent, and acceptable margins in a vacuum where there is no turnover, and hence no income and no access to money to continue to service the expectations, irrespective of how that expectation has been negotiated and moderated downwards.

ANY expectation of unjustified income by a landlord will have a negative and destructive effect on the lives of Tenants who are completely shut-down, to the extent that they simply do not have access to funds to meet such an illegitimate previously contracted but currently impossible, expectation.

Legally, the following realisation is begged for:  it is an issue of Interest and not Right because frankly this is the first time it has ever been needed to be dealt with. If what starts off as a reasonable, contracted expectation for Fixed Rent, becomes impossible to ordinarily service, because of a Force Majeure and Supervening Impossibility, such as COVID-19 on the one hand, and then active conscious intervention in response to COVID-19 by our Government on the other, then that entire contract becomes null and void.

It becomes a contract for an impossibility. By law, something which is Ultra-Vires – Surely? The fact that a wily Landlord and their Managing Agent henchmen, may have tried to wangle out of such a remote impossibility by neutralising Force Majeure contractually, is immaterial to the reality once presented as the COVID-19 Pandemic; that the contract has become unenforceable and illegitimate. It’s been suspended by Supervening Impossibility. For Landlords to assert their Lease Agreements as an issue of enforceable “Rights” is nonsensical in this instance.

For clarity’s sake, this bears emphasis.

For a Landlord to expect ANY contracted Fixed Rent to be paid, in an environment where their client, the Tenant is completely prevented from deriving any income because of a Lockdown, is not only naïve, but it borders on criminality, especially when Landlords collude to ignore such realities, as the Property Industry Group have done twice now in the course of one month in South Africa. Add to that, the creation of an environment of Social Distancing and the phenomenon of a Herd-Protective Culture, evidenced by Social Distancing, where it is not possible for Retailers to Retail, where customers and clients will not frequent, shopping centres, restaurants and public spaces any longer as was done pre-COVID-19.

This reality is exacerbated, by the ongoing expectation from most landlords that besides expecting to pass Rates, Taxes and Operational costs onto their tenants, they can also pass on the Landlord’s contractual expectation that those Tenants must be forced to pay fixed Rentals for properties which have been mothballed by a decision of Government.

Surely if landlords continue to insist that rents must be paid, despite recognising that their Tenants businesses are mothballed and not functional, even when they magnanimously offer to reduce rent and defer some of it for payment at a later stage, this behaviour smacks of unfairness?

When they all do it, when all landlords respond to multiple clients across the country in precisely the same way as a stock answer to appeals for Aid and Relief in the face of the pandemic, is this not incontestable evidence of COLLUSION and CRIMINALITY?

These property owners not only think that they’re above this law of nature, but they have now consciously acted, at the very least by misleading Government and at worst by acting in-concert with some players in Government, to create this situation of Unjust Enrichment which is here, now, at this time in the history of South Africa threatening to decimate the Small Retail Sector?

SAPOA, SA Reit and SASCA have collectively managed to get the DTI to accept that they, the Landlords, will decide on acceptable measures to offer Tenants instead of a neutral power or authority deciding. It is questionable whether these Landlords have any right to make any of the decisions which they have made in the first place. They have done so unilaterally, without engaging with the Small and Independent Tenants themselves!

If you choose, as Government to be the factor which constitutes the Supervening Impossibility for a Sector to operate, if you accept your role as the `Enabler of Force Majeure”, then if you do it for one, namely the Tenant, you have to do it for ALL, including the Landlord. If you suspend access to the Means of Trade, namely TURNOVER, INCOME and MARGIN, for the TENANT, that same Supervening Impossibility MUST apply to the Landlord, the Central Creditor in the lives of the Tenant? Anything else, especially when you permit landlords to make the final decision, and this thing does not work.

It ends up constituting the largest CRIME OF OMMISSION which a Government could ever perpetrate on an unsuspecting but generally rule-abiding and compliant Civil Society.

Patel will argue that all he did like that “Enabler” as a result of being lobbied by the three Property Associations, was to promulgate something called a “Block Release on the Property Sector” which allowed them to be free of the rigours of Competition Regulations, allowing for Collaboration, not Collusion to take place between ALL parties in the Property Sector.

It is somewhat clear, without specific expression, that Patel expected those Property Owners and Managers to properly engage with Tenants, not only the large Superstores, their Anchor Tenants but equally the most vulnerable. This means that group which constitutes in-excess of 60% of Retail Tenants in number, the Small and Independent Tenant, the Small Retailer and also the Commercial Tenant, the business which rents Office Space, Factory Space and Storage Space.

It is reasonable to assume that Patel did not conceive of a situation where engagement and collaboration between all parties would mostly only consist of unilateral collusion between the Property Owners and Managers to the exclusion of other “Contracting Partners”. This Closed Party Collusion was for the sole purpose of moderating and adjusting their Fixed Rental expectations. Only for this purpose, rather than dealing with any reasonable expectation that their entire entitlement for ANY “Fixed Rentals” would need to be completely SUSPENDED, entirely MOTHBALLED and not simply deferred.

In the same way that the expectation of their Tenants, their CASH COW, to derive any Income during the Lockdown and for any foreseeable period thereafter, has had to be SUSPENDED and MOTHBALLED in its entirety, because of supervening South African Law and Regulation.

Mahomed Vawda from the DTI, in response to these allegations, answered this way when being questioned about the Block Release: “All that we did is the attached regulations which is a competition exemption which allows tenants as a group to negotiate with landlords for rent reduction”.

He is indicating clearly in this response that the DTI expects tenants to affiliate as a group, and then engage with Landlords for Rental Reduction.

The fact that he and the DTI speak about Rent Reduction and not a Rent Payment Suspension, is troubling and problematic. It will most probably need to be dealt with by the South African Independent Tenants Association in a PAJA action, an application in terms of the Public Administration and Justice Act.

This implies that the DTI has gone out to bat for landlords, asserting their right to some rental payments despite the Tenants’ access to income being completely shut down and deprived.

As a result of this Block Release, instead of engaging as Vawda suggests, three things happened.

1. The three Associations, SAPOA, SA Reit and the South African Council of Shopping Centres created PIG – the Property Industry Group.
2. PIGs then came up with a totally unsuitable set of proposals for landlords to consider adopting in response to their Medium and Large-sized Tenants; NOT their Small and Independent Tenants. This was presumably because of the well-publicised kick-back from Large Tenants, including Truworths, Dischem and others. When Lockdown was extended, the PIGs came up with a second proposal which equally served to marginalise Small and Independent Retailers.
3. The Third thing which has happened, and the most damning and indicative of the scale of the PIG’s COLLUSION, is that in response to Small and Independent Tenants affiliating to SAITA, the South African Independent Tenants Association, and Group and Individual approaches from SAITA, Landlords have as a pack adopted the uniform response that they will not talk to their Tenants collectively or via any Representative, but only individually.

And these Landlords have, as a pack, proceeded to unilaterally place offers and demands to these tenants individually with Rent Reductions and most Rent Deferment terms, with ridiculously tight reply dates, not permitting these Tenants to take advice and certainly not allowing any engagement or consultation to take place.

This is completely contrary to what Mahomed Vawda indicated and to what the DTI had in mind in the first place when implementing the Block Release.

One primary GAPING HOLE in the PIG’s proposals is that no allowance whatsoever has been made, for any Tenant, large or small for the need for a Recovery Period. That’s when, after re-opening, those retailers will need to wait and work for a full recovery. Shoppers won’t automatically return or have the kind of money they had to spend pre-COVID.

SAITA’s approach to Landlords has been based on three primary proposals:

1. The first proposal is that Landlords and Management Agents both individually and collectively accept that they have access to Legal and Financial Expertise, and collectively to the PIG’s Consortium of Facility and Resource, whereas, the Small Independent Tenants do not; they are essentially on their own. For this reason, SAITA has called on the Landlords to recognise the constitutional right of the Small Independent Tenant to Affiliate and to join SAITA and then to mandate that SAITA collectively represent their interests in these engagements and negotiations. This is after all what the DIT’s Mahomed Vawda indicated was the original reasoning behind the Block Release?
2. The second was an Appeal to Landlords to change the way they calculate Rent. Instead of charging a fixed amount of rent based on the size of the property being rented, charge a percentage of Turnover. This way, when the Retailer is trading, what he pays in Rent will be relative to the amount of Turnover in the business. This implies sharing the entire range of risks, including that customers and clients will feel confident returning to the shopping centre and resuming normal consumer behaviour. Something of which there is little indication or guarantee at present. Creating the impression of a safe and ready centre is the task before the Landlord and Managing Agent and, after all, that the tenant has purchased from the Landlord when contracting for the property. Is the landlord, because of this unfortunate set of events, basically in Breach of the Lease Agreement and yet continues to insist on payment? SAITA maintains that this, if left unchecked, would constitute unjust enrichment.
3. The Final proposal was that Landlords have to account for the Recovery Period (between 6 months and a year), again based on charging a sliding scale of Percentage of Turnover as Rent as the only fair way of gauging the return of confidence, the recovery of the economy and hence the returning to normal of the Shopping Centre.

Ultimately, the takeaway statement to Landlords and Managing Agents is this: “If you cannot change your formula to account for shared risk, then your gestures are criminally deceptive.”