Economic Recovery

Empty malls and empty coffers

As the Government ponders the details of a package to help SME businesses struggling to pay the rent, Newsroom looks at how landlords and tenants being “kind” to each other can have many different interpretations.

On April 22, a letter went out from one of the most expensive law firms in the country to the owner of a Queenstown hairdressing salon.

Jo Taylor, whose Just Cuts shop in the Queenstown Central mall has been closed since lockdown began and can’t start up any time soon, hadn’t paid her rent for April, and the landlords wanted their money.

“You are hereby required to remedy the Default by payment of the sum of $4574.28 (including GST) together with the interest accrued by 8 June 2020,” the letter from lawyers Russell McVeagh said.

The interest would be charged at 14.5 percent per year (the landlord’s bank’s highest commercial overdraft rate, plus an extra 5 percent). 

Oh, and there was a $1725 extra charge to cover the costs of issuing the three-page default notice. That’s an almost 40 percent penalty, and it needed to be paid at the same time as April’s rent. 

Be kind, Jacinda Ardern says.

“If you do not remedy the Default within the time period stated the Landlord shall be entitled to re-enter the premises and cancel the Lease,” Russell McVeagh says.

But of course, it’s complicated. 

Just Cuts is a 225-salon franchise operation headquartered in Australia. Taylor is a small cog, a franchisee with just one salon which has been open only a year and isn’t yet making money. But she’s arguably part of a largeish wheel.

Queenstown Central is a new mall development in Frankton, out by the airport. The first tranche of 40 shops opened at the end of 2018, and there are plans for more shops, and offices; a deal for a hotel “for the fun-loving traveller” was signed in January this year.

There is debt, even though the company received a cool $19.6 million back in 2016 when it sold a bit of land next door to a housing developer.

“We feel as a private landlord of a single retail centre that Just Cuts, being a large Australian corporate with lots of stores and 1500 staff, has been flexing its muscle by refusing to pay us any rent and outgoings or to enter into any negotiations,” Queenstown Central general manager Simon Holloway told Newsroom.

The mall offered a 50 percent rent reduction for April and a 50 percent deferment for May and June, with repayment over six months starting September 1, Holloway says. It also waived the marketing contribution for April.

“We have only completed the first stage of the development, which is not yet fully leased, and our current rental income only just covers the interest and fixed costs," Queenstown Central told tenants at the end of March, when it came out with its rent offer. "We also confirm we are currently not making any principal debt repayments or taking any owners' drawings.”

Taylor says the way she’s been treated is unreasonable. Her husband works in the hotel industry, so without income from her day job as a business consultant the family would be in trouble. She sees Queenstown Central as lacking a “moral compass”. 

Jo Taylor (second from left) thought a franchise business would bring in extra income for the family. Photo: Supplied

Just Cuts’ Sydney-based portfolio manager Aaron Ward, who has been dealing with landlords all over Australia and New Zealand, says Queenstown Central’s approach has been particularly aggressive. 

Just Cuts was waiting until the NZ Government’s position was clear before it accepted any offers, he says. He didn’t agree to the Queenstown Central deal because he was worried if he signed up to the 50 percent rent reduction for April he would be committing Jo Taylor to paying 100 percent rent once the salon was open again, even though income would probably be low for some time.

Queenstown Central argues because of the layout of the mall the shops are legally accessible during a lockdown. Photo: Queenstowncentral.co.nz

Holloway says Queenstown Central “has acted in good faith and with compassion as requested by the Government based on all information available to us about ‘fair practice’”

Just Cuts “has chosen to ignore our offers and has elected to not pay us any rent or operating expenses whatsoever”.

He argues Queenstown Central’s contract provides for a fair abatement of rent if the premises are inaccessible. Because the shops in the mall largely open onto the road or the carpark he says the Just Cuts premises are not legally ‘inaccessible’ - they can be physically accessed at any time.

“Rather, the Government has determined that Just Cuts are not allowed to carry out their work anywhere – not premises specific. Tenants are simply not allowed to leave home rather than not allowed to access the tenancy. This is a lockdown not a lockout.”

That’s patently absurd, Ward says. They can’t run a hairdressing business from the mall and won’t be able to for a while yet.

“We are paying legal bills to fight something we shouldn’t be fighting. We’re fighting to give Jo a chance for assistance down the track.”

Up and down the country, the same sort of discussions are going on. Lawyers are being primed, if not briefed. Everyone’s opinion of “fair” is being tested, and often being found wanting by the people on the other side of the table. The virtual table.

Jack Porus is both a property lawyer and head of a property syndication business managing 38 tenancies. With his property manager hat on, he says he has reached agreement with most tenants.

“However we do have a problem with how to deal with tenants who have unrealistic expectations of what is fair and are simply refusing to pay their rent. A landlord would normally take steps by issuing a notice under the lease but this would seem high handed in the current circumstances,” Porus says.

On the other side, not all landlords are being reasonable,

“We are acting for one significant tenant where the landlord, which is a major corporate, is seeking to circumvent the new rules by issuing a statutory demand under the Companies Act rather than a notice under the Property Law Act (PLA).  We have applied to the court for a stay on the demand because it is a means of circumventing the new time periods under the PLA.”

Government steps in

It seems the Government has this week recognised that asking landlords and tenants to play nicely in the sandpit, with no rules on the wall and no teachers standing over them, isn’t always going to work.

Ministers have seemed firmly against intervention, but this week it seemed their resolve was cracking in the face of landlord and tenant intransigence.

Prime Minister Jacinda Ardern said last week she thought commercial tenants and landlords would work together to reach a fair agreement.

“However some parties on both sides of the contract appear unwilling to renegotiate payment terms,” she says. “Officials advise that some landlords are demanding full rent from tenants who have been unable to trade for several weeks and cannot afford it, while some, well-resourced tenants have written to landlords to say that they refuse to pay any rent for several months.”

PM Jacinda Ardern can't trust landlords and tenants to play kindly in the sandpit. Photo: Lynn Grieveson

Retailers H&M and Harvey Norman unilaterally told landlords early in the lockdown they wouldn’t be paying rent. 

“I can confirm that we are actively working on measures under which parties to a commercial lease would be expected to consider rent concessions in whole or in part for a period where the response to Covid-19 has had a material impact on businesses,” Ardern said.

While not providing any details of what the Government was proposing, she said it would be “something similar” to what’s being implemented in Australia.

The Australian proposal

Jane Holland, a partner with law firm Bell Gully, says the Australian Code imposes “mandatory good faith leasing principles” when a tenant has an annual turnover less than A$50 million. 

Bell Gully partner Jane Holland says the Australian and NZ situations are different. Photo: Supplied

“A rent reduction must be offered based on the tenant's decline in turnover during the Covid-19 pandemic period and the subsequent “reasonable recovery period". The reduction can be a mixture of waiver and deferral arrangements, but at least 50 per cent (and sometimes more) of the reduction must be a waiver. There are also restrictions on the landlord terminating the lease, implementing a rent review or drawing on the tenant's lease security during that same period,” Holland says.

“If a similar Code of Conduct is enacted in New Zealand the key question will be whether it will apply retrospectively, as many landlords and tenants have already negotiated rent arrangements to apply during some or all of the lockdown period. These negotiated arrangements might be more favourable to one party than those specified in the Code of Conduct. 

“In addition many New Zealand leases (unlike Australian leases) contain a “non-access clause", allowing the tenant to pay a reduced rent during some of the lockdown period. Will the Code of Conduct override those contractual provisions?” ​

Despite some uncertainty, a more hands-on government approach will benefit many tenants, if some of the “discussions” Newsroom has seen are anything to go by.

It’s not just Queenstown Central bringing in the lawyers . 

Hard line at RJH

Take Robt. Jones Holdings (RJH), New Zealand's largest private CBD office building owner, according to its website, with assets worth more than $1.5 billion. 

Room to be generous? 

Not necessarily.

Newsroom has seen documentation showing RJH started legal proceedings against a retailer in its 191, Queen Street building because it hadn’t paid April’s rent in full.

Cue Clothing executive director Justin Levis says the company offered to pay 50 percent of the rent, but RJH refused to even negotiate until it had received the full payment for April.

“Thank you for your proposal,” RJH lawyer and Meredith Connell partner Nick Flanagan wrote in an email.

“Our client is prepared to negotiate in good faith with Cue about its future obligations once Cue has met its existing ones. Accordingly, your client should pay the rent overdue for April and then call to discuss. The position otherwise remains as previously outlined: Cue is in breach of its lease and the statutory demand is in force.”

RJH was founded in 1961 by businessman Bob Jones (now Sir Bob), whose net worth was estimated at $1 billion in last year’s NBR Rich List, double what it had been six years before.

“No other landlord in our entire portfolio is being onerous whilst we are in force majeure,” Levis told Newsroom. 

“Legally it doesn’t look as if there is much I can do. Worst case scenario, Cue NZ will be bankrupt and forced to leave New Zealand.”

Flanagan said he couldn’t comment on his client’s commercial matters.

DiMauro family take tough approach in NZ

Or take family-owned Australian property group DiMauro, which owns $A1 billion-worth of Australasian retail properties, including the North City mall in Porirua, which it bought in 2018 for $100 million, and Auckland’s WestCity mall, which it bought the year before. 

The New Zealand malls are managed by global real estate company Colliers International. 

On April 21, Colliers director Gerard Earl wrote to tenants in the North City mall with an offer.

It was not a generous offer, given all malls are closed under both Level 4 and Level 3, and people are unlikely to flood back even under Level 2.

It wasn’t a sharing-the-pain offer.

For a start, there was no rent reduction at all, just a 50 percent deferral of the rent between April and June. From July 1 onwards, tenants had to start paying the deferred rent on top of their normal rent. And tenants had to pay full operating expenses for the closed mall.

The only concessions DiMauro was prepared to offer was not to charge interest on the deferred rent, and not to expect tenants to pay towards marketing the shuttered mall in April.

Richard Thomson has a gifts and homeware shop in the North City mall - one of 20 stores he has around the country.

As he says ruefully, “we don’t sell a single necessary thing”.

Thomson estimates he will lose approximately $40,000 in net profit in that one store for the two months of forced closure, “plus whatever else I lose going forward if sales are well down on normal when we reopen”. 

That will wipe out profit for the year.

“The DiMauro’s suggested contribution to ‘the pain’ [in that April 21 letter] is by my reckoning about $1,000 worth of interest on the deferred rental. About 1.5 percent of the pain.”

If he doesn’t pay, well the Colliers letter reminds Thomson of his legal obligations.

“The strict legal position under your lease is that all rent, rates, marketing and outgoings continue to be payable and the landlord has no obligation to provide any assistance.”

And the DiMauro family is quite entitled to call on any security deposit or bank guarantee “without notification”, the letter says. 

Effectively, Earl appears to be saying if tenants don’t pay up, DiMauro could call on the tenant’s security deposit or bank bond, or sue any guarantors personally.

“With some of my stores I’ve got fantastic landlords that have given us fantastic assistance,” Thomson says. Not the DiMauro family.

“The original position at North City was the worst I’ve come across.”

It seriously pisses me off that my pain is being used to support DiMauro’s Australian operations. 

He says it’s frustrating that the hard line comes from an Australian company, given in Australia, landlords will be expected offer rent relief commensurate with the amount of business lost by their tenants. 

“If my store was in Australia the landlord would be up for 50 percent minimum of April and May’s rent and 50 percent deferred over about 48 months,” Thomson says. 

“It seriously pisses me off that my pain is being used to support DiMauro’s Australian operations. It also further reinforces why the NZ Government needs to enact something similar and fast.”

If you wanted proof this is the case, Thomson says even Ardern hinting last week there was government action in the pipeline brought a new stance from the DiMauro family.

An email addressed to Thomson on April 29 said he should pay 100 percent of operating expenses and 50 percent of rent immediately.

But once the lockdown was over DiMauro might be prepared to offer rent abatement for the remaining 50 percent, or a so-called “contra” deal involving an extended lease term, the letter said. Thomson doesn’t know if DiMauro was offering this deal to all its New Zealand mall tenants, or only to the ones making the most noise.

Two days later, another, improved offer arrived. Colliers said the landlord would offer Thomson a 50 percent rent reduction for the lockdown period.

Thomson says it’s still at the conservative end of what his landlords are offering, with the most generous giving him up to 3 months rent free, or a 50 percent rent reduction over 3-4 months.

But it’s definitely an improvement. 

He says having several shops puts him in a stronger position because he can see the picture across the country.

“It’s a very lonely place if you are an individual tenant in a mall,” he says. “Everyone is trying to negotiate with their banks and the banks are saying: ‘What is your situation with your landlord?’ and people just don’t know.”

Richard James, national director of real estate management for Colliers International would not comment on DiMauro’s dealings with individual tenants at WestCity Waitakere and North City Porirua, except to say “numerous proposals” had been made. 

“These proposals are always subject to negotiation.” 

James says rent relief “is only one tool to assist retailers; helping them to generate sales is also a priority”. 

“We are actively working with retailers to implement click and collect, contactless collection and delivery options, as well as pointing customers towards our retailers’ online portals.”

A search of North City’s website showed contactless collection options available for three out of almost 100 listed retailers. 

Active marketing appeared to be limited to website links to some retailers’ online stores. 

Nick DiMauro appears on the Australian Financial Review’s list of that country’s 200 richest people, with $A646 million in personal wealth in 2019. 

UPDATE: Newsroom has published a number of stories about commercial leases, including tenant frustrations with listed company Kiwi Property. Following this story, one tenant with a business in Auckland’s Sylvia Park mall told Newsroom that Kiwi Property has verbally offered him a short term 50 percent reduction, though he hadn’t yet received a written offer.

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