As the nation gets pushed from pillar to post in the face of ever-changing stages of loadshedding, a sector bearing the brunt of the rolling blackouts is retail. Serena Ho, Director and Head of Consumer Marketing at BDO, discusses the impact of the energy crisis on both tenants and landlords, and what they should be considering to mitigate the potential risks.
The country is in a crisis and one has to look no further than your local mall or shopping centre to see how crippling the situation is becoming. Empty storefronts are on the rise and even the big giants of retail are suffering. South Africa’s largest retail group, Shoprite, says that it spent R560 million on diesel to keep its operations going during stage 5 and stage 6 load shedding over the last few months, Woolworths was incurring additional R15million per month in its Fresh food business due to wastage and diesel costs and stock shortages in the earlier part of 2023 resulted in the shutdown of many KFC and Nando’s outlets. And this is probably just the very tip of the iceberg.
With estimations from Eskom that ‘some level’ of loadshedding will continue for at least the next two years and that even if we do experience a break, the situation will not be resolved until 2027 at the earliest, the light at the end of the tunnel is looking increasingly dim for the sector.
Yes, the situation is dire for retailers trying to keep their businesses afloat, but it is also having a severe impact on property landlords who are facing a juggling act of placating cash-strapped tenants while keeping their properties out of the red.
The impact on landlords and the responsibility of tenants
Desperate tenants are increasingly demanding that property landlords invest in generators and invertors, and carry that cost without increasing rentals. But are landlords legally obliged to provide uninterrupted power supplies? In a situation that is no fault of either the tenant or the landlord, this is a slippery slope to navigate.
According to the TPN Credit Bureau, landlords are not legally obliged to provide generators or inverters, but if they choose to go this route, retail across the board will suffer. Investment into renewable solutions adds value to their properties and they can receive higher rental returns so it makes financial sense. If tenants are unable to trade during loadshedding, it reduces their turnovers, increases occupancy costs and limits profitability and opportunities for business growth. The sad reality though, is that landlords simply may not have the capital for such an investment.
If landlords are battling to stay afloat in these dark times does that mean it falls to the tenants to keep the lights on? This could be the case.
Who carries the responsibility?
A reasonable strategy for running a successful business includes planning for the worst, but expecting the best. Unfortunately this is just not possible in this situation and many hard lessons are being learnt – on both sides.
In an ideal world, perhaps the landlord could choose to provide a continuous energy supply, and the tenant could carry the pro-rata costs of maintenance, insurance and fuel. But in an ideal world we wouldn’t be plunged into darkness on a daily basis.
What is important now is that landlords and tenants realise that the onus is not squarely on the shoulders of one or the other. They have a joint responsibility to work together to find the best solutions that keep both parties in the business of doing business.
What is also critically important is that whatever the strategy is for the way forward, conditions must be in the lease agreement or in an addendum that is signed by both parties to avoid any ambiguity and unnecessary costs to mitigate risk at a later stage. Both parties must also understand that any additions are going to be seen as fixtures at the end of the rental period so they will ultimately belong to the landlord. On a positive note, as of 1 March 2023, businesses will qualify for a 125% tax deduction on qualifying investment costs on renewable energy over a 2-year window period. This means that landlords may be more inclined to opt for some form of renewable energy that can offer both parties some economic respite.
Commercial property and business owners simply cannot ignore the global shift towards renewable energy as the means to maintain their respective business sustainability. Implementing renewable energy solutions will not bring these businesses immediate relief, but the sooner both parties recognise the need, come to a fair agreement and begin the transition, the more quickly landlords and tenants will reach a happier – and more economically stable - destination.