Landlords and operators heading towards ‘mutually assured destruction’

Nando’s UAE managing director George Kunnappally believes they must work together
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George Kunnappally
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George Kunnappally

Last week, Nando’s UAE managing director George Kunnappally wrote on LinkedIn  that landlords continuing to charge high levels of rent to restaurants would result in “mutually assured destruction”.

He called on landlords to switch to a turnover rent (TOR) model while businesses try to get back on their feet during the coronavirus pandemic, but so far many have refused to do so.

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Caterer Middle East caught up with Kunnappally to ask why this is.

Why do you think landlords are hesitant to consider a switch to a TOR model, at least in the short term?

I believe it’s a combination of reasons. For ages, landlords have been comfortable with the fixed rent model in this part of the world. Whilst the landlords are aware of the TOR model, they seem to be uncomfortable with the inability to predict their revenue, when the TOR model will end and the fixed model will restart – due mainly to nobody knowing when the effects of Covid-19 will end and revenue will bounce back. To add to this, most landlords are highly leveraged and their financing agreements with their lenders are based on fixed rental income from tenants. If that changes, their cost of borrowing goes up substantially. In unprecedented circumstances like these, it is never an easy solution and it is not only up to the landlords and tenants alone to find the right solution - we also have to join hands with our bankers, regulators and government in finding a solution that works for all stakeholders. These issues are complex and will not just impact us in the short-term. 

How damaging could this short sightedness be for the restaurant industry if landlords don’t work with operators?

Landlords have to understand the margins and profitability of their tenants in each sector. Not all businesses make the same amount of profit from the same volume of revenue. Most of us will go out of business if landlords do not cooperate with us and agree to reasonable ‘percentage of sales as gross rent’ until revenues achieve pre-Covid-19 levels. Footfall is directly linked to percentage of occupancy and quality of tenant mix and landlords by and large are cognizant of this reality. We are in this together and we rise and fall together – landlords and tenants. Following the recent lockdown, I have been speaking to several restaurant operators and nobody is seeking indefinite rent waivers. All we are requesting is a reasonable ‘percentage of sales as gross rent’ to sustain our business until we turn the corner. Nobody is talking about being profitable this year, all we are seeking is for landlords to share the burden in the short-term. Over and above the base rent which many landlords have replaced with percentage of sales, tenants are still paying a host of other charges like service fees, chilled water fees, marketing fees and others - businesses cannot afford these during such tough times. Insisting on profitability during a pandemic is myopic in my view – be it the tenant or the landlord. Luckily, not all landlords are shortsighted and many are cooperating with operators in finding a win-win solution to overcome the crisis as true partners. However, we need all landlords to support us if the sector has to survive and the economy is to rebound.

What would your response be to landlords who say they simply can’t afford to reduce rents as they had their own budget for the year?

Holding onto a 2020 budget that was prepared late last year, when the world was a different place, is indefensible. We too, as restaurant operators, had budgets for 2020 that were prepared in Q4 of 2019. In Jan and Feb 2020, it held true and we achieved and even exceeded our monthly targets. From March, however, we discarded it and prepared new ones almost weekly. Today we prepare a new cash flow every few days as the situation changes so frequently. I believe every business has the capacity to adapt to its changing circumstances and that applies to landlords too. The budget is only an excuse. If the restaurant operators (with our limited resources) can inject cash, cut, chop, optimise, rationalise, extend, let go, refocus and recalibrate, the landlords certainly can too. The question to ask is what each one of us are willing to do so that all stakeholders can survive this crisis together.

Do you think this will see an overall change in the tenant/landlord relationship once this crisis is over?

I believe the inequity in the tenant/landlord relationship has come to the forefront during this crisis, primarily due to the manner in which certain landlords responded to the crisis. Key to this is the management of post-dated cheques in their custody. In retrospect, I believe that some landlords feel they could have managed it more empathetically. To say that rent was payable during the lockdown period was unjustifiable. To reference base rent with 2019 TOR was insensitive, whatever the rationale. For decades, no tenant has begrudged the landlords for being more profitable than themselves. Our landlords have invested huge capital and built world-class projects, communities, malls and attractions and taken a lot more risk than us - they deserve more profits and we have participated and celebrated in their success. However, during the recent crisis, the conduct of some landlords appalled tenant/operators. Many landlords refused to acknowledge there was a crisis and were in denial. Some landlords tried to cash our rent cheques even during the lockdown and soon after, leading operators to question the whole contractual relationship between landlords and tenants and approach regulatory authorities for assistance. Currently, the tenant/landlord relationship heavily favours the landlord because the lease agreement is prepared by the landlord. This crisis is certainly an opportunity to rectify the imbalance in the relationship and ensure a level playing field for both parties to function as equals. Only an equitable relationship can be a long lasting one.

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