Nat'l cabinet code of conduct for leases “extremely beneficial” to QSR industry: expert

Chains are told to seek advice on the code’s implications.

The mandatory code of conduct for commercial leases of small to medium businesses will be “extremely beneficial” for both franchisors and franchisees within the QSR industry, which has been seeking rent relief amidst the coronavirus pandemic.

“It will provide a degree of cash flow certainty and will significantly reduce the pressure on small businesses during this pandemic period and for a recovery period afterwards. So in terms of the overall position for small and medium sized lessees and the vast majority of the QSR [industry], they will be the big beneficiaries from this code,” LeaseInfo founder and CEO Simon Fonteyn explained to QSR Media in an exclusive interview.

Fonteyn specifically pointed to two of the code’s fourteen leasing principles in which landlords must offer tenants “proportionate reductions” in rent payable in the form of waivers and deferrals of up to 100% of the amount usually paid, and that said waivers must be at least 50% of the total reduction in rent payable.

Tenants with an annual turnover of up to $50 million are eligible for the code’s provisions, which Fonteyn reiterated as applicable at the franchisee level.

“Almost all franchisees and franchisors will be caught and will benefit from this. So it's very beneficial for the QSR industry,” he said.

'Gaps' in interpretation
However, Fonteyn noted that the code had gaps in how particular provisions within the code should be interpreted.

“The government's obviously done this in a hurry and you can't blame them. They have done their best, but to some extent, they have handed it to the states to say, ‘Well, here's the code - you guys legislate,’” he said.

The main issues, he said, are around the code’s principle of proportionality in negotiating, the time frame covered by such assessment, the definition of turnover and the type of documents expected to be submitted by tenants to landlords to illustrate their drop in turnover performance.

“If a landlord is required to comply with this, they would need a certified document to say, ‘Well, this is the turnover and it's audited or it's been lodged with the government, like a BAS statement,’” Fonteyn argued. “I doubt landlords, particularly the bigger ones are going to accept the tenant’s word. So [the principle] needs to be fleshed out."

Another area of uncertainty, Fonteyn said, is the principle of outgoings. The code said landlords should, where appropriate, seek to waive recovery of any other expense or outgoing payable by a tenant, under lease terms, during the period the tenant is “not able to trade.” Landlords also reserve the right to reduce services as required in such circumstances.

“But does that mean that outgoings are waived totally or in proportion to how the rent reduces?” he asked.

“Anything that's not clear will cause confusion. And if it's open to interpretation, it will just, in reality, prolong negotiations until it becomes clear. So, to some extent, we're still in a waiting position to see how the states legislate,” he added.

Whilst states are expected to enforce it differently, Fonteyn is confident that similar principles will apply. However, he noted discussions between landlords and tenants have happened and are happening “rapidly” due to majority of rents due this April, anticipating that both parties are getting together to reach an agreement, at least in the short term.

“Once April rent is sorted out, and the dust settles, then people have more time to come to terms with the rest of the pandemic period. But the immediate hurdle is April,” he said, adding that he expects other QSRs to follow Hungry Jack’s and Red Rooster’s moves to cut or defer rent whilst waiting for legislation to pass.

In any event, Fonteyn sees landlords themselves taking a “significant amount of pain” from this code, as they are expected to negotiate different types of deals for different types of businesses.

“It's going to be very painful for the smaller landlords...they are going to have a significant cash flow problem as a result of this,” he said.

Planning for a recovery
He advises QSRs to seek advice on the implications of code and how the states would administer it. Planning on what a recovery looks like for the brand is also key.

“There needs to be some sort of strategy and thought as to how this should play out from both the landlord and tenant point of view. So they need to think this all through and sit down and rationally then work out what the next steps are,” he said.

“Modeling and planning is now key in this quiet period. Now is the time to be streamlining those working on processes and really trying to run the business in a very streamlined manner for when this recovery starts to kick in. My personal belief is that it is not going to be an immediate recovery, there's going to be a lag time. Just how much that lag is, no one knows.”

Fonteyn expects there would be a “huge” shift to online channels for chains, as consumers continue to get used to the new normal.

“Now that we've become sort of used to socially isolating and ordering food and getting it delivered, it's becoming more culturally ingrained in our society. There will also be a fear of going back to normal social activity for quite a while, until there's a vaccine or there's confidence that people can return to the streets,” he said.

As of press time, the NSW and QLD governments said it will both provide up to a 25% on land tax for the 2020 calendar year as part of packages worth $400 million and $440 million respectively, provided that savings are passed on to tenants in the form of commensurate rent relief.

"Typically, land tax makes up around $7 to $10 per square meter in outgoings, so this could amount to a few thousand dollars per annum in savings for a typical QSR," Fonteyn said in reaction to NSW's rescue package.

This is a developing story.