Dubai: UAE retailers will remain “at the mercy” of mall owners and landlords as long as they hold post-dated cheques on their rent payments – for even up to three years in advance. This is one of the issues retailers are hoping to change in their lease clauses after the pandemic struck and forced the need for new ways to do business.
“If these mall owners have no intention of submitting these cheques, then why ask for them in the first place?” asks Mohammad Al Madani, Chairman and CEO of Al Madani Group, which has interests in F&B and, until recently, in branded apparel as well. “When retailers have been requesting them not to submit their cheques after COVID-19 struck, most malls went ahead and still tried to encash them.
“Even when they knew retailer accounts would not have the funds necessary to clear the payments. This is not how good business transactions are conducted – submitting cheques now is nothing but coercion and trying to place retailers on the wrong side of the country’s law.
“Insisting on post-dated cheques is a tactic to keep retailers at their mercy – permanently.”
Retailers cutting across sectors have been hoping for a more lenient view from their landlords in recent months. But so far, only a minority among landlords have allowed full waiver of rents for the April to June period, when commercial activity had come to a standstill and extended that to the rest of the year.
In response, retailers are trying to get the authorities to intervene – or at least provide them with a platform to air their grievances. Senior sources in the retail sector confirm that some progress could yet be made in working out a deal on how rental contracts are structured.
But some retailers are starting to lose hope – As long as malls demand post-dated cheques for years in advance, there’s not much we can do,” said the regional head at a leading retailer. “In July, one mall in Dubai presented our cheques and both were returned. And this after we had told them well in advance not to submit. We were promised they wouldn’t until rent relief agreements were finalized.
“Yet, someone at the mall tried to encash those cheques… and they bounced.”
Al Madani points to mall operators such as Al Futtaim Group, which owns Festival City, and Al Zarooni Group, owner of Mercato, which were quick to come up with waivers, of three months. “These weren’t rent deferments or reductions, but full waivers,” said Al Madani.
“The other leading mall managements are coming up with “relief” offers – but they don’t seem to have any bearing with reality. For instance, retailers have been told that they will not enforce the “turnover clause” this year.
“At the same time, we are being told that for next year, they will base the rents on turnover achieved this year or based on 2019 figures. Now, everyone knows that no retailer in the UAE is likely to come anywhere near their 2019 sales.
“So, in effect, we will be saddled with rent increases for 2021 based on 2019 numbers – and when we are still far away from getting close to pre-COVID-19 sales. There is no win-win formula here, retailers are just being pushed into a corner.”
What’s a turnover rent clause?
It’s more or less standard practice in the UAE retail space, whereby the mall owner or landlord is trying to generate an additional percentage as rent over and above the agreed base rent. So it would be the base rent plus a percentage of the retailer’s annual sales.
“It’s all fine when everyone is having a bumper year sales-wise and consumer confidence is sky high,” said Al Madani. “But when retailer sector is down 40-50 per cent from last year, what sort of relief are malls offering when they say they will not impose turnover clause this year?”
No easy answers anywhere.
“It depends on the mall, the location and the unit’s location within the mall itself,” said Andrew Love, Partner, Head of ME Capital Markets at Knight Frank Middle East. “Certainly, secondary and older malls are having to cut rents to attract tenants.
“The same applies to units within malls that are compromised or have poor passing footfall. The super-regional malls have shown more resilience, especially for units located in high footfall zones (this is typically around the anchor).
“We have also seen landlords being more open to turnover-only rents, and for new malls we have also seen tenants being offered capital expenditure (capex) contributions for fitout along with more generous grace periods/rent free.”