As featured in the November 2021 edition of the Queensland Hotels Association’s QHA Review.
The virality of COVID has made business operations near impossible to predict, requiring businesses, particularly in the hospitality industry, to implement reactive measures to stay afloat.
However, in spite of the above, and since pubs have reopened after the lengthy 2020 lockdown, Queensland has seen unprecedented interest in property and hospitality assets.
Whilst this interest is fantastic to see, the risks surrounding transactions are significantly higher than usual. As COVID has taught us time and time again, assets that rely entirely on people being out and about are subject to significant and sudden commercial risk.
To help our clients mitigate potential risks, we ensure they are as prepared for the unknown as possible. One way to do this is by including ‘COVID’ related clauses in contracts.
This article focuses on the ‘COVID’ clauses we have seen in relation to business transactions and leases given the value of freehold properties has increased rapidly, cap rates on rental income have strengthened and higher multipliers are being applied to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
Business Transactions
In the significantly increased number of business transactions (due to so many falling over last year and interest rates remaining at all time lows), we have seen purchasers seek to include conditions tying their purchase price to the EBITDA from trade. While this is the traditional way to value a business, with Covid, EBITDA numbers have been much more inconsistent (variable) than in the past. This is a result of the uncertainty relating to lockdowns and subsequent cancellations and forced closures. By way of example, a business contract may include a provision stating the EBIDTA from trade must be at pre-covid levels (or a level that is satisfactory to the purchaser) for a certain period of time before triggering the obligation to settle.
We have also seen purchasers seek to negotiate a reduced purchase price in lieu of the inclusion of a Covid condition.
Ultimately, every deal is subject to commercial negotiation between the parties and the prospect of that business being affected by another lockdown.
Leases
Recognising the support afforded to tenants by the federal government’s mandatory code of conduct, and the state government’s Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020, prudent tenants are seeking to include clauses outside of the legislation that deals with the negative effects that a business may suffer from Covid.
For example, we have seen tenants include rent abatement and reduced rent provisions that are triggered by the loss of revenue due to Covid impacts. Defining what evidence is required to illustrate this loss of revenue is vital from a landlord’s perspective and should be thoroughly documented.
We have also seen the introduction of termination provisions for prolonged Covid impacts. As affording termination rights to a tenant is disadvantageous from a landlord’s perspective, it is important to seek legal advice when drafting termination and abatement clauses.
Conclusion
As the twists and turns of Covid continue, so does the uncertainty for lenders, freehold owners, vendors and purchasers. Through the addition of these (and other relevant) clauses, we seek to protect our clients from unnecessary risk and ensure that clients are aware of and understand where areas of significant risk might arise. Should you have any queries about purchasing, selling or leasing a hospitality business in the current Covid landscape, please contact me on (07) 3224 0230.
