Since COVID-19 struck, as food and beverage business owners and operators, we have done everything within our power to stay afloat.
We injected fresh equity into the business, took out new lines of credit. Most of us terminated long-serving employees through no fault of their own; cut salaries and took pay cuts ourselves; sent team members on unpaid leave; sought extended credit periods from suppliers; secured moratorium on bank loans; received royalty and fee waivers and closed some outlets permanently.
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We gave away more discounts (further hurting our already razor-thin margins), delayed vendor payments and bounced rent cheques - all just to survive. There is nothing more left for us to do, other than to approach our landlords - seeking rent relief.
The restaurant sector’s impact on the UAE economy, and especially that of Dubai’s, is immense. In Dubai alone, over 150,000 people work in the restaurant industry. The Dubai Economic Department (DED) has issued over 12,000 food and beverage related licenses.
For months, the business community has been talking about how to make the landlord-tenant relationship a balanced one. At no point in the last 25 years has the imbalance in this equation become more evident as it has during this pandemic.
Don’t delay a solution
Here are a few suggestions on how to better balance this relationship, making it mutually beneficial:
* The regulator can introduce a standard lease agreement that is even-handed rather than one-sided, restrictive and onerous (like many of the agreements we have today).
* Post-dated cheques (PDC) are a matter of huge concern for tenants, especially when they are required to issue these for 3-5 years of the lease term. And sometimes years before a project has even taken off the ground.
A lot can change in a few months, let alone years. If the regulator could find a way to replace the security provided to landlords via PDCs with a redressal mechanism, wherein erring parties, be it tenants or landlords, can be brought to justice, I believe that would be a win-win for both stakeholders.
* Transparency is key to making any relationship equitable, especially when times are tough and revenues down. Questions are bound to be asked about the fees charged for almost anything and everything – be it service charges, chilled water, marketing fees and more. While we have world-class malls in the UAE, our lease agreements should also leave nothing to be desired.
In many European and North American jurisdictions, there are laws that prevent a landlord from charging a rate in excess of what a tenant would pay for a utility, if the tenant had directly procured the same from the regulated utility provider. It is recommended to have such safeguards in the UAE as well.
* Some leading shopping center landlords have set up Retail Tenant Representative Forums, which meet frequently to discuss and address tenant issues. This is a step in the right direction to ensure transparency and encourage collaboration between tenants and landlords. If all landlords set up such forums and encourage tenants to share feedback, these interactions can lead to greater partnerships and mutually beneficial relationships.
* Dubai’s Real Estate Regulatory Authority (RERA) is doing a fantastic job in regulating residential property related rental disputes. If all commercial properties could be brought under its ambit, that would be a game-changer for all tenants.
* The regulator could include an ‘early-exit’ clause in lease agreements, wherein a tenant can exit any lease agreement by serving 30 days of notice and without paying any penalties. There is little risk for misuse of the clause, as it is extremely unlikely a tenant would be willing to write off capital expenditure costs by vacating a premise if it is at least EBITDA-positive.
An early-exit clause in lease agreements could single-handedly make our agreements unbiased, creating a level playing field for landlords and tenants to negotiate. The tenants can discuss and agree on all terms of the lease with the landlord directly, which would also save the regulator and courts valuable time, money and effort.
* Landlords would seek reciprocity for such a clause and that is certainly a fair ask. The regulator could add a ‘kick out” clause in the lease agreement, wherein if a tenant does not achieve a mutually agreed revenue target per year, the landlord reserves the right to terminate the lease unilaterally. Such a revenue target would be above the breakeven sales for the unit/tenant and would be mutually agreed on at the time of execution of the lease.
* The regulator could then also add an occupancy and footfall clause to the agreement. This would ensure that should the footfall drop in a shopping mall or community centre, or the number of units leased and operating drop, or if any of the anchor stores close, the contractual gross rent shall be replaced with percentage rent until the discrepancy is rectified. This ensures that the tenants’ interests are also protected and balanced against that of the landlord.
Tenants, by and large, look forward to productive and mutually beneficial partnerships with their landlords. Until lease agreements become more equitable, the relationship between tenants and some of shopping centre landlords in the UAE will be an unhappy union at best.
If it is to be a lasting partnership for the benefit of all stakeholders, a more balanced relationship is what we all need to strive for. As we stand today, we are far from that.
- George Kunnappally is Managing Director of Nando’s Restaurants in Dubai.