How can QSRs best seek rent relief amidst COVID-19?

Executives suggest a holistic approach in recovery.

Leasing arrangements are expected to change in the next few months due to the COVID-19 pandemic, even as questions on how retailers and landlords seek mutually beneficial solutions amidst this time of uncertainty continue to mount.

Lauding the National Cabinet’s mandatory code of conduct for COVID-19 impacted small to medium enterprises, Foodco managing director Serge Infanti anticipates that such short-term changes to leasing structures will result from a “willingness” between lessors and retailers to work “collaboratively and constructively.”

“My view on this is that most lessors will sit down and work out - whether it's within the boundaries of the Code or within the requirements of the retailer - a situation that gets through the next three to six months. Structures will change and I don't think...the conditions of the Code are going to be relevant in every situation, I think there's going to be some flexibility around retailers,” he said.

Most landlords Infanti has spoken to, he said, have indicated a desire to “keep doors open and to return the shopping malls where they were” prior to COVID-19.

“So the feeling I'm getting from most lessors is that they're open to discussions on what's the most appropriate mechanism - the most appropriate formula to apply to retailers, whether it's as per the code or as per the specific needs of a retailer,” he explained.

Infanti expressed his concerns over the Code’s deferred rent provision, explaining that it needs to be integrated in an ongoing lease instead of a repayment plan.

“Prior to COVID-19, we were in a pretty depressed retail environment anyway and that leases based on supply and demand were starting to change. So there were terms that we were able to negotiate even pre-COVID, which were different to what was around maybe five or 10 years ago, so there can be some changes in the way that leases are,” he said.

He also disagreed with sentiments about percentages rent being a way forward indefinitely.

"It may well be a solution in the short term but ultimately the supply and demand will dictate terms and lessor will be keen to set base rentals as a base for valuation," he added.

Calling for a “fair-basis” form of rent, San Churro CEO Giro Maurici said the code was “encouraging”, but lamented how the whole situation has placed them in an “uncomfortable position”, being in between their franchisees and landlords in dealing with rent issues.

“On one hand, I've got loyalty to my franchise partners who we need to support and coach and guide through this crisis. But the reality is that they simply can't afford to sustain those rents at current levels, as we could all imagine,” he said.

"When I get letters from landlords [and their] lawyers, citing the lowest common denominator interpretation [of the code], it leaves us as a franchisor in quite a vulnerable position."

Franchise Council of Australia CEO Mary Aldred said there is “a bit of confusion” regarding eligibility in the code’s provisions, as some may be held by franchisors who do not fit in the government’s JobKeeper programme.

The code, subject to per-state legislations, stated that tenants with an annual turnover of up to $50 million are eligible for the code’s provisions, which include “proportionate reductions” from landlords.

“Franchisees who might be captured under a head lease by the franchisor who are seeking rent reduction from themselves will not be able to derive the same benefit under the corresponding head lease. So it's a pretty significant business risk at the moment which we're working through,” she said, understanding that the code pertained to group turnover.

Aside from raising this concern to the state government level, Aldred said the FCA is also working with the National Retailers Association, the Australian Hotels Association and the Pharmacy Guild of Australia to put forward an application to the Australian Competition and Consumer Commission on an exemption on collective bargaining.

Aldred stressed that there is a “very strong” regulatory and compliance framework attached to the code in order to ensure that rent relief is properly passed by franchisors to its franchisees.

Aldred also lauded the ACCC’s judgment to allow current and former members of the Australian Retailers Association to collectively bargain with landlords.

“It’s a good move...I think it's better when a number of bodies can work together on these issues rather than inundating the ACCC with multiple applications. And the good thing about our application is that [...] if the ACCC accepts our application, it will cover all of them and our member businesses,” she said.

Binding mediation, explained
When landlords and tenants cannot reach agreement on leasing arrangements as a direct result of the COVID-19 pandemic, either party is told by the code to refer it to applicable state or territory retail/commercial leasing dispute resolution processes for binding mediation, including Small Business Commissioners/Champions/Ombudsmen where applicable.

Australian Retail Lease Management chief executive Stephen Spring stressed that in order for a mediation to be successful, both parties must act in good faith.

“The mediation process cannot be used in a court of law if the parties cannot settle the differences at that time. The most important thing is that you've got to go in there prepared. You don't go in there just saying ‘I want this and this is what I'm after’ with a landlord saying, ‘I want this and this is what I'm after’. There's a logical step process,” he explained.

In his experience, Spring says about 85% of parties involved in mediations reach an agreement but remains unsure how it will turn out amidst the pandemic.

“Normally, what a mediator does is [have] bullet points of all the important points and tries to find some common agreement. If there is no agreement, the next step is a certificate of failed mediation, and then people are going to go off to tribunals and courts and all the rest of it,” he explained. “Each party doesn't get what they want in total, but they get what they can probably live with.”

Spring also sees binding mediation as a potential option for franchisees that have increased their outgoings dramatically, provided it reaches a “significant” amount.

“If we're talking about relatively small amounts of money in the overall scheme of things, it should be something that should be negotiable with the landlord,” he said.

When to ask for a potential exit strategy
Asked about businesses that were not financially viable prior to COVID-19, have high occupancy costs and are now paying deferred rent, Infanti advised franchisees or fellow franchisors to discuss with landlords about a potential exit strategy.

“The deferment of the rent will essentially be the nail in the coffin for you. There is an obligation to maintain commitment to the lease and the Prime Minister made that very clear when announcing the principles - both parties are to maintain the existing lease,” he said.

“I would suggest that the best way to do it is simply sit down with the tenant or the landlord, work out a commercial solution that you can live with and then, if you need to, proceed to mediation to see if you can resolve it. But the reality is, you are bound by a lease and you probably need to commercially negotiate your way out of that.”

On the level of documentation needed by landlords, Spring advised that a business’ JobKeeper number is the starting point.

“If it turns out that the business is not viable and you have to show profit and loss reports and your cash flow forecasts as an exit strategy - yes, that's okay. You can do that as a separate exercise,” he said. “Anything else like assets and liabilities and other things that they asked for...and not necessary at this stage.”

Balance of power in lease negotiations
Maurici, meanwhile, expressed that the balance of power in lease negotiations might swing to the franchisor in some circumstances.

“If you're a landlord in a shopping center, you don't want to see a plethora of vacancies; you want to be able to still provide that experience to your customers. It's just prudent for a landlord to want to keep a tenancy with the lights on, so in turn that will give us some power in the discussion which we wouldn't have otherwise had,” he said.

Coupling long-term and short-term measures
Asked whether long-term total business viability is more important than short-term measures, Aldred said both go hand in hand.

“For example, just reopening dining in the next couple of weeks is not enough in and of itself. It needs to be staged, I think, with a return to work and reopening in states that are affected [by school closures] because if kids are still home, it's difficult for working parents to return to work,” she said, adding that dining facilities will have difficulty in reopening and expecting customers when parents are not returning to their work spaces.

“We're very clearly pivoting from those restrictions and hibernation into the recovery phase. But I think that's going to take months and years ahead to fully get back to a healthy level of business for everybody,” she added.

Local marketing, local travel
Expecting that social distancing would persist for up to 12 months, Infanti expects the food & beverage, hospitality and entertainment sectors to have a faster rate of recovery. Sustainability, a key issue that Foodco has been very vocal about, will also remain as a “key focus”, along with the need to rebuild consumer confidence in local communities.

“Retailers need to be ahead of the game in this, mak(ing) sure that they've covered all the aspects of social distancing, and communicate that to the consumer. Make sure the consumer feels comfortable coming into their environment. Make sure that communication with staff is clear and concise as to what's required in this area,” he said.

“For my team, we're spending a lot of time on local area marketing, making sure our social media is up to scratch and in ensuring that our consumers are aware that we are taking the necessary steps to rebuild that confidence.”

Echoing Infanti’s take, Maurici anticipates a significant migration away from shopping centres to local strips and digital channels after the pandemic, a transition may be further prompted by a resurgence in local travel.

“The reality is that most of our strip sites have far better accessibility and proximity to the customer bases,” he said.

Editor's Note: Insights from Aldred, Infanti, Maurici and Spring came a panel discussion, moderated by LeaseInfo founder and CEO Simon Fonteyn, during QSR Media's Rent Relief for QSRs During COVID-19 and Afterwards webinar last 7 May. Watch the full webinar below: