Coronavirus spread: Retailers, multiplexes, mall owners spar over rentals

Chains, multiplexes to invoke force majeure clause; litigations to increase

Differences have begun to crop up between retailers/multiplex operators and mall owners over deferring rental payouts in the wake of the COVID-19 outbreak. While retailers are talking to mall owners on a one-on-one basis to invoke the force majeure clause in their contracts, multiplex operators are seeking legal advice on the same, sources have told Business Standard.

The issue acquires significance given the lockdown mode in which key Indian cities find themselves in following an increase in coronavirus cases. Retailers and multiplex operators want mall owners to either forgo rent for the period of the shutdown or lower rent in the event the mall is open but footfalls are low.

"We are revisiting all agreements we have with mall developers as each contract is different," said a senior executive of a leading multiplex operator. The executive said rentals vary from Rs 50-100 per sq ft for a multiplex, implying payouts could be anywhere between Rs 10 lakh and Rs 60 lakh for properties between 20,000 sq ft and 60,000 sq ft. 

The math is similar for retailers, too, who cough up 10-15 per cent of their top line on rentals alone, sectoral experts said, prompting many to renegotiate contracts, especially those coming up for renewal in April.

Mall owners, however, say that no decision has been taken yet on the matter. "We are not working on anything right now. Everything is at a standstill," an official at Phoenix Mills, which runs malls in Lower Parel and Kurla in Mumbai, said. Rajneesh Mahajan, chief executive officer, Inorbit Malls, which has properties in Andheri and Malad in the financial capital, also said the same.

But persons privy to discussions said lack of consensus between retailers and mall owners could result in litigation growing in the coming months.

"One way out could be shorter extensions when lease agreements come up for renewal. However, once the market picks up, developers will increase rentals and extend the lease period," a Mumbai-based consultant said.

Cost break-up of retailers (as part of sales)
 
Rentals: 15
Salaries: 10
Marketing expenses: 8
Utilities: 2

Sources: Industry

Lalit Agarwal, chairman and managing director, V-Mart Retail, who is also a member of the Retailers Association of India (RAI), said mall owners were partners and that retailers were looking at an amicable solution to the issue. "I don't think the endeavour is to damage our relationship with mall owners. They are important partners," he said.

Retailers, however, have already made a representation to the Department of Promotion of Industry and Internal Trade (DPIIT) asking for incentives for the retail sector in the wake of the coronavirus outbreak. They may also meet mall owners via their industry bodies in the near future to iron out differences, sources said.

Multiplex operators, meanwhile, say that they have begun consulting legal experts on the issue. “As a legal process, one needs to give a notice immediately and not post facto. We are considering legal options to see if rental payments can be suspended for now,” an executive said.

What is force majeure
 
A force majeure (FM) means extraordinary events or circumstances beyond human control such as natural calamities, epidemics, war, strikes and riots. An FM clause in a contract frees both parties from contractual liability when prevented by such events from fulfilling their obligations. It does not, however, excuse a party’s non-performance entirely, but only suspends it for the duration of the FM.