Dear All,
Today should have been our last day of Lockdown, the extension while not unexpected has still been a bitter pill to swallow.
I am going to mostly move away from Government relief to discuss a very contentious topic at the moment, and that is of property rentals. This is a double edged sword as we have many clients holding investment properties whilst equally as many are lessees.
A shout out goes to Beryl and John, Mark Harper, Ben Voogt, my father Koos and of course our firm’s Attorney Jonathan Brookes for providing verbal and written commentary to me on this by both themselves and from various legal minds.
Whilst a mixed bag of opinions to be sure, viewed in context with the press releases one can work out the general approach being applied. I am largely confining the commentary to Commercial Leases which is what is on everybody’s radar. Whilst I have waded through reams of Latin terms, which no doubt fascinate legal minds, to us mere mortals are about as interesting as watching grass grow so I will try and confine commentary to a collection of points.
- Common Law is very clear that if performance becomes temporarily impossible the obligations of the parties are not extinguished entirely but suspended for the duration of this impossibility.
- Viewed within the ambit of COVID-19 this obviously applies where you are unable to occupy your work premises due to lockdown.
- You may of course have waived your common law right in the Lease Agreement which contracts the Lessor and Lessee to each other for the right of use of the property in question.
- You would need to refer back to the lease in question and look for either a force majeure clause which provides a mechanism for the suspension of a party’s contractual obligations should a circumstance beyond their control arise preventing performance. The clause usually sets out what constitutes a force majeure and how the parties’ obligations will be suspended.
- Alternately your lease may have as clause such as “the Tenant shall not have any claim against the Landlord for any loss or damage which the Tenant may suffer arising out of vis major or casus fortuitus or any other cause, either wholly or partly outside the Landlord’s control”.
- I could define the Latin for you but no-one really cares aside from the legal fraternity. Basically if you are a lessee, point 4 is good and point 5 is bad. If you are a lessor, vice versa.
- If you are working at greatly reduced capacity due to COVID-19 the law recognises that a reduced rental may indeed be called for over the period of lockdown.
To summarise this even further, if you are not occupying the premises due to Lockdown and your lease does not provide anything to the contrary, your lease obligation would probably be suspended over this period. The attitude of ‘Big Business’ is quite simply to freeze all lease payments, as done by Famous Brands and Foschini to name a few. I am not encouraging such a militant approach by any means as it’s going to be good business ethics combined with open communication which will carry us through the Pandemic.
- If you own an Investment Property encumbered by a Mortgage Loan and your rental ceases, the effect on your cash flow can be fatal.
- The banks have been most forthcoming with giving 3 month payment holidays on instalments. I use the word holiday loosely as they are purely allowing you not to pay instalments for 3 months but are obviously still levying interest on the outstanding.
- So as the landlord you reduce your cashflow down to utilities, levies and the like, you put yourself into a similar position as the freehold owner.
- This position is that your loss is limited to opportunity cost, a slightly elevated interest charge and the other sundry charges mentioned above. When this is viewed against losing a tenant, not a very onerous cost at all.
- This is not Easter come early for lessees however as any suspension of payment assumedly extends the lease period commensurately. They should realise that they should be paying their share of the property holding costs and if they are utilising the premises in any way at all, should be willing to negotiate a reduced rental with their landlord.
As one can see, despite both parties having legal rights, they are full of if’s and but’s which is why it’s a bit senseless for any party to climb too high on the horse but to rather fall back on the age old skill of negotiation. A recent survey shows that from SMME tenants a meagre 10% can afford to pay rent, either fully or partially, by the end of this month. The Landlord needs to make sure his costs are covered whilst the tenant needs to minimise his cash outflow as much as he can in order to make sure his business survives.
It’s a pipe dream to imagine many of us will show a profit over the lockdown period, as an article I just read on this said, ‘If tenants do not survive this period neither will the landlords’. Whilst perhaps a bit over the top there is a foundation of truth to it.
The saving grace to all may come in the form of the debt relief fund, which judging by the list on our cloud server, we have, at your request, registered many of you for. We have been waiting patiently for what benefits this can yield and preliminary information shows that it may be providing payouts to cover rental obligations and municipal rates. We have not determined if this is a grant or a loan, nor do we know the limits or process to apply, as of writing. As far as the rental goes, that would be a boon to both contracting parties. The Rates are obviously of equal importance but a bit pointless, in my humble opinion, to take money from a Government fund to pay a tax. Regardless, I would be the last one to look a gift horse in the face, so we are trying to find out what we can on this and will communicate more to you as soon as we do.
To briefly touch on the other initiatives.
The Employee Relief Fund is the one with the most activity. Taryn from the office has never worked so hard, her husband tells me it’s making for a really nice peaceful lockdown for him, he sends his thanks both to us and all of you for making it so. I have said it many times, if you have employees which are not working a full day and you are a UIF contributor it would be foolish not to apply. It would also be foolish not to apply as soon as you can, as there will no doubt be a backlog and you need to get your position in the line secured. So if you have done nothing yet, for the sake of your business and for the sake of Taryn’s husband, please get hold of MRM to get a submission in for you.
A small grant which has flown under the radar a bit, is one from the Tourism sector which appears to be a R50 000 cash injection for tourism related business. As this is a grant, it is not repayable and at face value looks cool. When you read the legislation however, it is a bit narrow. It firstly excludes any business not run through a company or trust which negates a fair amount of B&B’s and AirB&B’s. The second is it excludes franchise chains of restaurants, bars and the like.
A freehold restaurant in a juristic entity will however qualify as would any guest house, resort etc. There are a few more hoops to jump through but we think we have personally got hold of any of our clients who are in that sector. If we have missed any of you, aside from that being a terrible oversight, you can get hold of Derane in the office who is on top of all the prerequisites for application.
As far as other things economic, everything these days seems to come with a double edge. The repo rate dropped 1% this week, Good news if your business is geared, not so good if you rely on your interest as is the case with many pensioners. Government appears to have finally stood up to SAA, an entity which has shown ever increasing losses since 2011, and refused them the exorbitant amount initially allocated in the Budget pre COVID-19. If memory serves me the amount was R16 Billion, and it’s going to find far better use being spread around to combat the economic and social effects of the pandemic. Bad news however if you are on their payroll, or as some of our clients are, suppliers of goods to the airways.
The JSE is yet another anomaly. Initially we took a bit of a hammering with the all share index being knocked from its lofty heights of around 55 000 down to around 40 000. This was a 38% whack and, in my uneducated opinion, was the tip of the iceberg. As of the time of writing we have recovered to around 48 000 which means we have only lost 13% of value since the pandemic which coincided with our Moodies downgrade.
I really don’t want to be negative during this time but when something is unbelievable, it is usually without substance. I hear the shouting about increased mine revenues due to the weak rand and all the rest of the reasons or excuses being thrown around but pre – allthisnonsense it was a stretch of the imagination to find value in our stock exchange at 40 000, never mind 55 000. In purely my opinion, the exchange is continuing to be overvalued. This is not advice, and I am not a certified advisor, so only the idle opinion of one person. Just bear in mind the words of the iconic Rodriguez who sings, ‘A monkey in silk is a monkey no less’, and tread extremely warily when making any decisions based upon equities for the moment. Global economies are reeling, there may well be a second wave of financial hardship coming which will spill over onto us. Make sure you are hassling your financial advisors about it now as you don’t want to be stomping around in the shallows when it comes.
Aside from all of that, I hope you are all managing as well as can be expected. As you know by now we are mostly still working albeit with some short time and a few temporary layoffs so we are around for any advice or help you may need.
In the meantime keep productive, I am sure many of you have been nominated for the egg challenge, which is a very useful way to spend lockdown. I know there is a closely guarded video of Shireen doing it, and have seen videos of clients such as Steve Ackhurst, and I think Jeremy Marshall, doing it. I have been nominated by a fishing buddy so will probably get to it on the weekend.
We are South African, we are resilient and we have awesome humour. Let’s keep it that way.
Keep well, Keep positive and be COVID-19 free.
Chris, Shireen and the MRM Team
