/ 29 April 2011

Small retailers lose out under CPA

Small Retailers Lose Out Under Cpa

The protection of small tenants in shopping centres has been watered down so much in the Consumer Protection Act (CPA) that it is virtually meaningless, say disappointed industry experts who had hoped that the new law would bring relief to small tenants who suffer the whims of all-powerful shopping centre landlords.

Cape Town-based commercial lease lawyer Reid Corin, a champion of small-business tenants, said hopes were dashed with the final version of the CPA stipulating that leases are only covered if the tenant is a natural person, as opposed to a juristic person such as a CC or company.

The CPA has revolutionised fixed-term contracts such as security-company contracts, cellphone contracts and gym memberships by allowing individual consumers to cancel them at will with only 20 working days’ notice. Even though the CPA as a whole classifies CCs and companies with turnovers of less than R2-million as consumers, the rules dealing with the cancellation of fixed-term contracts specifically excludes all juristic persons.

While it is theoretically possible that a small-business owner could sign a shopping centre lease as a sole proprietor, in other words as a natural person, the most likely effect of the CPA will be that commercial landlords will from now on insist that tenants register their businesses as companies.

Corin says: “Try to go and get a lease in your own name. I’ve been turned down flat by everybody. I’ve tried to negotiate new leases (on behalf of clients) in at least four different malls in South Africa and they simply refuse to put it in (my client’s) own name.”

Although it is illegal to frustrate the provisions of the CPA by discriminating against those protected by it, for example by purposefully refusing to do business with individuals as opposed to registered businesses, it is likely to become an “unwritten rule” in the shopping centre industry, says Meredith Leyds, a legal advisor for the South African Property Owners Association (Sapoa), a lobby group whose members control 90% of commercial and industrial leases in the country.

The dodge is likely to be camouflaged as general commercial policy rather than an overt sidestepping of the CPA. But everyone knows where it comes from, says Corin. He says that a letting agent at one of the large property firms recently admitted to him that their policy of not signing leases with sole proprietors is only a few months old and stems directly from the CPA’s protection of individual tenants.

Vera Velasis, executive director of the Franchise Association of South Africa (Fasa), concurs: “I haven’t come across a landlord who is willing to sign a lease in the name of a sole proprietor or natural person.”

She says the franchise industry, which is intimately involved in shopping centres, “feels quite let down” by the final version of the CPA. “A lot of the concerns in our industry hinge on the lease contract and it appears that we may not be getting the protection that we thought we would in terms of the landlord relationship.”

She says up till now, franchisees have been subject to the whims of shopping centre managers, for example: “Suddenly there is scaffolding in front of the door (of a small tenant in a shopping centre). ‘Oh, we’re doing a revamp, we’re fixing this, we’re fixing that,’ (say the centre managers). The poor tenant’s turnover just takes a dive and there’s simply no response. There’s no reduction, no negotiation, there’s no willingness from some of these landlords to speak to tenants.”

Starting from scratch
Corin points to another disappointment for those who hoped that the CPA would protect small shopping mall tenants. For most retailers, having to move premises means losing more than half their customers and virtually having to start from scratch. The shopping centre landlords use this to extort huge rental increases from their small tenants when their leases — usually five or 10-year contracts — come up for renewal.

The designers of the CPA tried to counter this imbalance of power by giving small tenants the right of first refusal when their lease comes to an end, in other words, the centre management has to offer the new lease to the incumbent tenant before offering it to a new tenant.

Corin says this principle made it into the final version of the CPA, but was so “watered down” after lobbying by the landlords that it is now meaningless because the CPA does not compel a landlord to offer a new lease to a tenant at a market-related price.

What will happen in practice, Corin explains, is that a small tenant who is paying R400 per square metre, for example, will come to the end of his lease. The landlord abides by the CPA by offering a new lease to the tenant, but at R850 per square metre, figuring that the small business may well swallow a doubling of its rent instead of losing the customer base that it has built up in the mall. If the small tenant refuses the extortionate rental, the premises are let to a new tenant at, say, R450 per square metre.

Corin argues that the right of first refusal would only have protected small tenants if the CPA compelled the landlord to offer the premises to the incumbent tenant first at the same rate that it offers to a new tenant — R450 per square metre in the example. Because the CPA does not specify this, extortionate lease renewals will continue with impunity.

Corin believes that lawmakers had succumbed to the “emotional” arguments from the landlord lobby that any weakening of their interests would lead to losses for pension funds, many of which are invested in shopping malls. But by protecting shopping centre owners too much, they hurt the retail tenants in the malls. “What government didn’t pick up (in drafting the CPA) was that retailers are a source of income. They employ people, they collect VAT, they contribute to the economy, but that seemingly wasn’t (considered) as important as protecting landlords’ rights, which is really a pity,” says Corin.

Despite the CPA’s soft stance towards landlords, the industry is not taking any chances. Sapoa is lobbying government to remove property leases entirely from the ambit of the new law. Sapoa CEO Neil Gopal says his organisation has scheduled meetings with the Department of Trade and Industry and the National Consumer Commission to clarify what he terms a “grey area” in the Act.

Sapoa argues that the CPA must be interpreted as not covering property leases at all, because lawmakers could not have intended to include immovable property in the CPA’s definition of goods and services. Treating a cellphone contract and the lease or sale of a building in the same way is impractical and will hurt the property industry, says Gopal.

Leyds, the Sapoa legal adviser, says giving small tenants the power to walk out of their lease agreements at 20 working days’ notice is a threat to the shopping centre industry. “The value of your shopping centre is based on your income stream, and your income stream is based on your leases, and if your leases are at risk, your income stream is at risk, which puts a negative impact on your value. If you want to get finance from a bank, the bank looks at your projected income stream based on your lease agreements that you’ve signed, and (the application of the CPA to leases) will definitely put the industry to a certain extent at risk.”

Leyds admits, though, that only a tiny number of shopping centre tenants remain sole proprietors, “little dry cleaners, tuisnywerhede and biltong shops” in mostly small community shopping centres.

Why, then, the anxiety on the part of the landlord lobby to be exempted entirely from the CPA? Apart from the possibility that landlords may in future be successfully challenged over discrimination if they refuse to sign tenants as sole proprietors, Fasa’s Velasis points to another long-standing sore point in the industry: it is the small shops, who pay up to 10 times more per square metre than the large anchor tenants, that provide shopping centres with their profits. Landlords are unlikely to give up their stranglehold without a fight.