Twelve days into lockdown and John Jack, CEO of Galetti Corporate Real Estate says that just under 50% of its clients have requested financial relief in the form of a structured payment holiday from their landlord.
Offices across South Africa are now bare, and companies are scrambling to save on costs and reduce overheads. Financial institutions have come to the party offering a short payment holiday and government has put various measures in place to support small businesses.
There are two schools of thought on the matter. “Let the lower risk category go back to work and isolate the higher risk category, namely the older and immune compromised” and then “Continue the isolation until we have a meaningful change in the statistics”, says Jack.
“The first argues that we cannot afford the economic calamity which will lead to equal loss of life and financial ruin to be balanced with the loss of life from the virus. One also needs to take into account how effective isolation in crowded living conditions could possibly be?”
“The lockdown has put plans on hold. Many companies have halted their investment plans for the time being. Those planning to take occupancy of a new office space or to commence with fit-outs have had to press ‘pause’,” he explains.
“This causes an immediate and drastic cash flow cut off for the entire system; tenants revenue drops immediately because of the halt in trade, landlords income dries up as the tenants are unable to pay their rental and lastly the banks are impacted as a significant number of landlords will be unable to service their debt if this situation is protracted. The effects could be dire”.
Communicate & Compromise
Jack says that this is a time for compromise and that agreements should be put in place for companies requesting payment holidays. The pain needs to be shouldered in equal measure but this generally all starts at the top, yet banks have been silent on structures to help larger business and landlords facing waning rental income.
“Be transparent and communicate throughout. Work together during this period and follow best practice guidelines by putting everything in writing. Also remember that a WhatsApp message is now legally binding as per the Alienation of Land Act”.
Jack shares revised rental agreement options as per a few major themes below:
The first is to opt for a rental holiday for an immediate and pre-determined term say 3-6 months.
“This rental is then deferred to a later date where it needs to be repaid, secondly this rental could be capitalised into a longer lease period and paid off as though a loan. Lastly, a complete re-structure of the lease agreement and this is typically the best measure where all factors are taken into consideration”.
“We use actual market benchmarks to determine how and extension of lease can be offset against a smoothed lease profile where the tenants effectively gets a reduction in rental to more appropriate market levels in exchange for and extension of the term of lease” he explains.
“We would recommend appointing a corporate advisor to handle this process as there are a number of factors to take into consideration when modeling the new lease agreement. One in which the tenants could see significant savings and the landlord could benefit from an extended lease term”.
Jack says that the rental agreement must be restructured and signed by both parties once an agreement is reached.
To Take the Payment Holiday, or Not?
The option for payment holidays by financial institutions has been welcomed by both the business and the private sector. “While it’s far more desirable to take out a payment holiday than to default on a loan, it’s important to review the interest rates associated as well as the T’s and C’s. These differ per financial institution so be sure to consult your financial advisor in this process.”
Force Majeure, Is it Applicable?
“We have had a few queries on the eviction process for defaulting tenants during lockdown. At a time like this, force majeure could come into play”. It really depends on whether or not your lease agreement contains a force majeure clause or if you will need to rely on common law.
Force majeure looks to exceptional events or circumstances that are out of our control. “Tenants could receive some reprieve under this particular clause,” explains John. “As long as the events and timeline are well defined.”