How a Malaysian Covid-19 Act could help mall tenants and landlords who are in limbo

Cover Story: Mall tenants and landlords in limbo

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This article first appeared in The Edge Malaysia Weekly, on April 20, 2020 - April 26, 2020 as ' Mall tenants and landlords in limbo'

JOE, a retailer who operates a store in one of the leading malls in the Klang Valley, is worried about his business. He does not see a recovery in sight for at least another year.

“The situation was already bad even before the Movement Control Order (MCO). We started to notice far fewer cars parked at the mall in January and February and our customer traffic dropped by 40% to 50%. Following the MCO, I don’t see people returning to the mall like they did before for at least another year,” Joe tells The Edge.

An operator in the retail pharmacy business — which is allowed to operate during the MCO — paints a grimmer picture. She sees a recovery only in late 2021 and expects businesses that cannot survive post the six-month loan moratorium given by banks to individuals and small and medium enterprises to close down in early 2Q2021. The rest are likely to restructure to stay afloat.

Yet another retailer who runs stores at several premises says with no instructions from his landlords on payment during the MCO, he has stopped paying rent.

Other than grocery shops and retail pharmacies, retailers that were already experiencing declining sales in January and February have had zero sales during the MCO, which is now in its third phase.

The government had first announced that the MCO would take effect from March 18 to 31 but twice extended the lockdown for another two weeks, from April 1 to 14, and then from April 15 to 28.

Retail Group Malaysia (RGM) estimates that a total of 209,000 stores that account for 61% of total retail outlets in the country and 63.3% of total retail sales are closed for the six weeks. Only 126,000 retailers, comprising supermarkets, hypermarkets, mini-markets, convenience stores and pharmacies, have been allowed to stay open.

In a special report released last week, RGM, on behalf of the Malaysia Retailers Association (MRA), says during the six weeks of MCO, retailers of non-essential stores will incur an estimated RM14.31 billion in operating costs, including rental of premises, head office expenses, insurance, advertising and promotional expenses and repair and maintenance.

Add to the number another RM6.18 billion in staff costs, comprising salaries and wages, allowances and contributions to the Employees Provident Fund and Social Security Organisation.

With many retailers expecting full recovery to take up to a year, how will they keep their heads above water during the pandemic, and especially when social distancing is encouraged?

“If an Act is not passed to legislate the current situation, by granting a minimum six-month moratorium, it will open the floodgates for litigation and cases will be decided at the discretion of the judges,” says lawyer Ranjan N Chandran, a commercial and construction partner at Hakem Arabi & Associates who has been overwhelmed by calls lately from many anxious tenants seeking advice on what they should do.

“Visits to the courts is going to be ‘the New Norm’ post-Covid-19 and much time and cost will be consumed with unnecessary litigations instead of focusing on the urgent revival of business,” he writes in an April 10 article entitled “Proposed Malaysian Covid-19 Act, The Law We Need” in the Malaysian Law Review Appellate Courts.

 

How some malls are helping their tenants

Some mall owners have eased the burden of their tenants by waiving the rent during the MCO while others have waived the service charge as well. Mall rent generally entails basic rent or a percentage of sales (whichever is higher) and a service charge for electricity, security, air conditioning and so forth that the mall provides.

Retailer and mall owner and operator Mydin Mohamed Holdings Bhd is the owner and landlord of 27 of the 69 stores it operates. Managing director Ameer Ali Mydin says his company has waived rent and service charge for its tenants during the entire MCO period.

“There are two kinds of landlords, the ones with a heart and the ones who have lost their heart. We, at Mydin, have given all our tenants a rental waiver during the MCO, which will cost us millions of ringgit [in lost revenue],” he tells The Edge.

“We are also a tenant, so we understand. No landlord has come to us with a 100% waiver of rent … but we are negotiating with them. Some just said no.”

It is worth noting that between March 18 and 31, several malls announced that they were waiving the rent and/or service charge for the period. But little has been heard of a continued waiver during the second and third phases of the MCO.

“Sunway Malls was one of the first to grant free rent to non-essential retailers that were required by law to close during the MCO Phase 1 (March 18 to 31). This was done to bring them some relief and to ease their cash flow as revenue was impacted during the period,” Sunway Malls tells The Edge.

“Subsequently, the government announced further MCO extensions (Phases 2 and 3). There are still uncertainties as to when the MCO will be lifted. In that respect, we are studying the MCO in its entirety (rather than phases) and working out a more precise plan to address the issue more holistically and effectively. For retailers, apart from rent, there are also other operating business costs that need to be tackled in unison. Otherwise, the effect will end up cancelling out each other,” adds Sunway Malls.

The group operates a total of seven malls, three of which — Sunway Pyramid, Sunway Putra and Sunway Carnival — are part of the Sunway Real Estate Investment Trust.

Pavilion REIT is another mall operator that provided a two-week rent waiver to its tenants. “Pavilion REIT management accorded free rent (service charge included) from March 18 to 31 to non-essential businesses across its Pavilion REIT malls (Pavilion KL, Pavilion Elite, Damen Mall and Intermark Mall, with a total combined net lettable area of 2.28 million sq ft). There is no commitment as yet for the MCO extensions as the company needs time to discuss and to ascertain the overall business impact on the malls,” says the REIT’s manager.

However, an industry source suggests that some shopping complexes may not have proceeded to extend discounts and rebates during the MCO period possibly because they expect legislation to come into force to tackle the issue.

Tan Sri Teo Chiang Kok, director of Bandar Utama City Centre Sdn Bhd, which owns and operates the 1 Utama Shopping Centre, says, “The Malaysia Shopping Mall Association (PPK) has advised that rental assistance should be on the principle of ‘shared burden’, so most malls gave 50% off the rent to those non-essential tenants that were not allowed to operate during the MCO 1 and MCO 2 periods. MCO 3 has just started and we have not decided [what to do] yet.”

1 Utama is also not waiving the service charge. ”As the shopping mall has to operate for essential service tenants, all the antecedent services must continue to operate, for example, security, hygiene and air conditioning, which is covered by the service charge.”

Teo, who is also PPK president, estimates that the shopping mall industry would have suffered losses of at least RM2 billion during the first and second phases of the MCO and the restart of business. “Now that the MCO 3 has come into effect, the losses will definitely increase,” he says.

Asked for its comments, IGB REIT, which manages Mid Valley Megamall and The Gardens Mall, says, “We hope you understand that our correspondence with our tenants is confidential, and any disclosure would be a breach by either party. Having said that, we are fully aware of being impacted by the effects of Covid-19, and have taken proactive steps on our end as well as towards tenants to mitigate the impact.” A least two of its tenants, when contacted, say they have not received any form of rental rebate.

Berjaya Land Bhd last week announced that it will waive the rent for its retail tenants at Plaza Berjaya, Wisma Cosway and Kota Raya Complex in Kuala Lumpur and Berjaya Megamall in Pahang for the period of March 18 to April 14. Likewise for Berjaya Times Square Sdn Bhd for its tenants at Berjaya Times Square.

Suria KLCC declined comment.

 

Urgent need for temporary relief  law?

With so much uncertainty as to when the pandemic will end, retailers are naturally concerned. Last week, the MRA urged the government to declare the Covid-19 outbreak in Malaysia a force majeure and to introduce a Covid-19 bill to offer temporary relief to businesses that are unable to fulfil their contractual obligations.

Zico law partner Jeyakuhan S K Jeyasingam, who specialises in dispute resolution relating to property and strata management law, and succession law, supports the enactment of legislation as the existing laws may not provide much recourse to a tenant. “If a tenant wishes to seek a reduced rent due to the unforeseen impact of the regulations (MCO), such tenant will have to check if the tenancy agreement provides a force majeure clause that is properly structured.”

He adds that in the context of a tenancy agreement, the purpose of a force majeure clause is to contractually allocate the risks between the landlord and the tenant with regard to the occurrence of future events in specific circumstances. “A force majeure clause is intended to include risks beyond the reasonable contract of a party. In essence, it frees both parties from liability or obligation when a supervening event takes place,” Jeyakuhan explains.

But what if the contract lacks a force majeure clause? In this instance, a tenant may have to look for another avenue to see whether the tenancy agreement can be frustrated. However, Jeyakuhan points out that frustration cannot be applied to the landlord and tenant instance as the act (in question) has to be one that would render the tenancy impossible to be carried out. Thus, frustration does not arise in the current situation as the retailer can continue with the tenancy after the MCO is lifted.

“Enacting a Covid-19 Act will help the economy for sure, if it is carefully worded and implemented,” Jeyakuhan tells The Edge.

Hakem Arabi & Associates’ Ranjan cites the example of three countries that have already passed laws to help business owners and citizens during these trying times. The Coronavirus Act 2020 became law in the UK on March 26, Act XII of 2020 on the Containment of Coronavirus became law in Hungary on March 31 and the COVID-19 (Temporary Measures) Act 2020 became law in Singapore on April 7.

“Malaysia’s parliament needs to pass a legislation expeditiously so as to alleviate the plight of the business community to ensure their continued survival and existence,” Ranjan says, adding that the validity should be for one year subject to review by parliament.

And when the law is passed, it must also have retrospective effect to state that the temporary relief period shall commence from, for example, March 1, 2020. Covid-19 was declared a pandemic by the World Health Organization on March 11.

It is worth noting that Singapore ensured its Covid-19 legislation had retrospective effect commencing Feb 1 even though it only became law on April 7.

To Ranjan, Singapore’s legislation would be a good reference point to enact Malaysia’s Covid-19 law with a focus on three principal areas: temporary relief for inability to perform the contract, temporary relief for finance (liquidation) and temporary measures concerning tax.

In the area of temporary relief for inability to perform the contract, he suggests that the Malaysian legislation should provide relief for, among others, the inability to perform contract for loan facilities, performance bonds, hire-purchase agreements, retail tenancies, event contracts, tourism-related contracts, construction contracts and lease of immovable non-residential properties for a moratorium period of six months.

In the example of a landlord and tenant, under the proposed Act, the tenant should be entitled to a six-month moratorium that will relieve the tenant of possible actions, such as court arbitration, bankruptcy or winding-up proceedings, no appointment of receivers and managers, no repossession or termination. He further advises that legal proceedings should be stayed during this moratorium period and provide relief against eviction and/or distress proceedings of any form by the landlord.

The moratorium does not extinguish or absolve the tenant’s liability to pay even if he did not open for business during the MCO. It just means that the tenant can now defer his rental payments for up to six months and no action can be brought against him. “In the absence of a Malaysian Covid-19 Act, the tenant will be at the mercy of the landlord to be gracious enough to grant a deferment and/or partial reduction of rent or better yet, a total waiver,” Ranjan tells The Edge.

He observes that some forms of executive action have been taken in the absence of a Covid-19 legislation, including a move by the Companies Commission Malaysia to increase the debt threshold for the winding-up of companies from RM10,000 to RM50,000.

Lembaga Hasil Dalam Negeri has also deferred all tax instalment payments for six months for tourism players, such as tour agencies, hotel owners and aviation companies. These executive actions should be incorporated into the Malaysian Covid-19 Act to give it the force of law, Ranjan says.

For an Act to be enacted, a parliamentary sitting is required. However, parliament will only meet on May 18 following a postponement by the current administration.

This means that the earliest the Covid-19 Act will come into force, should it be introduced, will be in late May. Although it can have a retrospective effect, retailers and mall operators will be left in the dark until an announcement or decision is made on whether the proposed Act becomes law.

When asked for comments on whether some malls had not provided any relief or extended waivers because they were anticipating a Covid-19 Act to come into force, PPK’s Teo says, “Extending rental relief is the prerogative of the mall operator and done on a mall-by-mall basis and can also be on a case-by-case basis. Any Covid-19 Act should ensure fair protection for both contracting parties and not encourage wilful abuse, such as withholding dues because of carte blanc protection against the legal rights of a contract.”

At the end of the day, just as a retailer will not be able to operate without a landlord, a mall will not be able to function without its tenants. Both landlord and tenant need a win-win solution.

 

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