GYİAD Law Bulletin: Effects Of Covid-19 Outbreak On Retail Sector

Coronavirus' effects on the world in such short period have caused various reflections in different sectors. Considering the worldwide Coronavirus epidemic, and its effects on public health and the economy, it is noteworthy that the emergency measures that should be taken by the retail sector are quite a lot. While one of the issues to be addressed in the retail sector due to the epidemic is the disruptions in the supply chains; the other fields consist of, the decrease in sales on the merchandising side, the problems in the rental relations and the complications in the field of employment with the effects of the epidemic, there is a dire need for solutions in such fields.

In this study, the effects of Coronavirus epidemic with respect to Retail Sector and solution suggestions will be discussed alongside the remaining subjects excluding the employment issues which cover all sectors.

One of the most important issues of the retail sector is the sector’s offline consumer dependency. Since the offline sales to customers form the basis of the sector other than the e-commerce sector players, the deliberate avoidance of crowded areas due to Coronavirus outbreak which has been started before the current administrative measures we shared below, the number of customers entering to Shopping Malls (“Malls”) where many stores coexist and street stores branded as “flagship stores” have been negatively affected directly. This effect also aggravates the obligations undertaken as a tenant due to the lack of commercial efficiency expected from the relevant stores and jeopardizes the sustainability of the rental relationship and the continuity of the stores.

First of all, one of the biggest problems encountered is the decrease in the number of people entering the Malls (footfall) due to the administrative measures taken and change in the daily habits of the people. In the light of the developments in recent days, the status of the rent relations, which are directly affected, should be evaluated under the scope of such effect. As explained, due to the declining turnover in the face of decreases in-store sales, it becomes almost impossible to meet the minimum / fixed lease prices by the Retail sector. In the coming days, it is within the possibility that turnover rents will be dramatically below the minimum rents.

In the light of current developments, the stores of many brands operating in the retail sector were temporarily closed as of March 19, 2020 with the Presidential recommendation and public health concerns, many shopping malls have temporarily ceased their activities, except for primary consumer shops (such as markets, pharmacies, etc.). Although there are also shopping malls that do not cease their activities, their actual status is not different from shopping malls closed due to closed stores. While the problem in rental relations is dealt with primarily due to store and Malls closings, the problems in the supply chain should also be addressed separately, since most companies operating in the retail field continue their e-commerce activities. 

  1. Rent and Shopping Mall Relations in Retail Sector
  2. Closing of Stores and Shopping Malls

One of the effective solutions that can be implemented in order to prevent coronavirus epidemic has emerged as the closure of stores and shopping malls. In this regard, it can be seen that many big brands operating in the retail sector have closed their stores and the shopping malls have started to close as per to the closure of such stores. Especially, considering the content of the lease contracts concluded between Shopping Center Developer Companies and Retail Industry Players, it can be seen that the issue of closing the stores against the opening and closing hours of the shopping malls could be subject to many sanctions. The negative consequences of measures taken on rental relationships in terms of preventing Coronavirus outbreak should also be evaluated legally.

First of all, whether the Coronavirus epidemic and related administrative measures can be evaluated as force majeure in lease contracts or not has become a subject of discussion. The effect of the Coronavirus epidemic on the force majeure of the contracts is discussed in detail in our article: The Discussion on The Covid-19 Effect to the Force Majeure Clauses in Contracts dated 23.03.2020. The concept of force majeure can be described as those uncontrollable events that occurred after the signing of a contract, that are not the fault of any party and that make it difficult or impossible to carry out a normal course of business and fulfill the terms of a contract for reasons beyond its control which may result terminating the contract. Accordingly, if the Coronavirus epidemic is considered as a force majeure, the violation that may occur due to the epidemic and in cases where the acts in the lease contracts such as closing the stores and / or closing the shopping malls in order to prevent the epidemic can be excluded as a violation.

One of the current developments in this regard is the statement dated 18.03.2020 made by the Presidency of Turkey, in line with the precaution decisions enacted by the Ministry of Interior Affairs in 81 provinces on 16.03.2020. Within the scope of the said statement, it is stated that citizens should stay away from social life for 3 (three) weeks, and therefore this statement directly affects the current business life and the store employees and customers in the shopping malls. In line with these precautions, the Shopping Center Investors Association (“SCIA”) submitted a recommendation to close the shopping malls by applying to the Presidency, taking into account the demands of the community and retail sector representatives regarding public health. Furthermore, by the statement made by Turkey Shopping Centers and Retailers Federation ("TSCRF"), it has been stated that the government's recommendation to the citizens to remain at home excluding mandatory situations has been fully agreed and that they support the decision to close all commercial areas, shopping malls, food and beverage establishments, except for health, logistics services, food, and essential goods sales points which should stay open throughout the country, and the most importantly, they will support the businesses that ceased their activities during the closing period of the shopping malls and stores which are a member of TSCRF, by not issuing invoices and not demanding rent.

When all of these issues are evaluated together, it is inevitable to accept the impossibility of performance in terms of lease contracts. Article 136 of the Turkish Code of Obligations No. 6098 (“TCO”) states; “If the fulfillment of all obligations under the contract becomes impossible due to the reasons that the borrower cannot be held responsible, the debtor is free from fulfilling those obligations.”  It should be especially evaluated that the impossibility of performing in contractual relations has occurred due to the fact that taking extraordinary measures in the light of current developments has become inevitable.

In this regard, although it is necessary to analyze and evaluate each lease contract, it can be stated that the implementation of the force majeure will be fair in the lease contracts between the shopping malls that have decided to close and the retail sector representatives who close their stores in such malls, within the scope of the epidemic by carrying out this process with the utmost care and goodwill. If force majeure clause is included in these contracts, the implementation procedure is defined in detail in the relevant provision of the contract. Accordingly, it is essential for the Parties to carry out effective communication within the framework of the correspondence and notification procedure in accordance with the contract, to suspend their obligations during the force majeure event, and to continue their obligations arising under the contract with good care by complying with all provisions of the contract when the force majeure ends.

  1. Adapting and/or Reduction of Store Rents

Although many stores and shopping malls are closed with the support of SCIA and TSCRF in line with the circular issued by the Ministry of Interior and the statements made by the Presidency, as explained above, fewer open shopping malls and stores should be evaluated separately. In line with the recommendations, even if the stores and shopping malls remain open and change their working hours to 12.00-20.00, this will not prevent the decrease in footfall, and it will be inevitable to adapt the lease contracts to the situation.

When we refer to the legal aspect of the current situation, if the measures taken due to the Coronavirus effect are considered as a difficulty in fulfilling the terms of the lease contract; TCO article 138 can be applied. Such article regulates the situation as follows; “An extraordinary situation that is not foreseen and expected to be predicted by the parties at the time of the contract arises due to a reason that does not arise from the debtor, and at the time of the contract it changes the existing facts against the borrower to the extent that it is contrary to the rules of honesty, and the borrower has not yet performed its debt or has become excessively difficult to perform. If he/she performed his/her rights reserved, the borrower has the right to ask the judge to adapt the contract to the new conditions, and if this is not possible, rescission of the contract. In permanent performance contracts, the borrower uses the right of termination as a rule, rather than the right of rescission.”   This provision also closely concerns the lease contracts. In this case, we will come across the issue of adaptation of contracts, and the important thing here is that some conditions must be met in order to be able to adapt the contracts. The first of these conditions is the situation change that occurs after the establishment of the contract. The condition sought here is actually an extraordinary situation. Although the opinion of the doctrine states that the extraordinary situation should be interpreted narrowly, stores going out of concept because of being empty and the closure of theme parks, cinemas, theaters that led to customers coming to the shopping malls can be evaluated as an extraordinary situation. The conditions of unpredictability, the length of the contract and the unexpectedness of the performance, which are among other conditions, must also be present in the concrete case, whereas the tenant will be able to request adaptation from the lessor and, if this request remains non-responded, may also request the fulfillment of the request in question from the judiciary. Another point to remember is that the effects of the Coronavirus epidemic will continue and the changes it will cause in social behavior are still unknown.

If we evaluate the situation in terms of stores that are closed and remain open, we believe that mutual contract should be a priority within the framework of good faith rules, without allowing the negative impact of the coronavirus epidemic to turn into a conflict between the Contracting parties. In the retail sector, brands, shopping mall investors, high street store investors, banks and financial institutions are the rings of the sustainable life cycle that cannot be torn apart; It will be possible to get rid of situations that none of the parties can predict and cannot be under control such as Coronavirus epidemic by taking less damage, thanks to empathy, mutual goodwill, and communication. In this context, in order to minimize the loss of the stores in the retail sector, which is one of the most important links of the chain, in the light of the terms of the contract, a safe way of providing a sustainable relationship with alternative solutions such as adaptation in rental value, temporary incentives, grace periods, the mere turnover application should be preferred. The epidemic will eventually be defeated, hence, the parties of the life cycle of the sector will need each other constantly. For this reason, the commencement of the negotiations for the signing of amendment protocols including provisions regarding the adaptation and reduction of the relevant rents is recommended.

  1. The Disruptions in Supply Chains

As the Coronavirus epidemic manifested itself in many parts of the world, especially in China, and the impact of the virus on our country has increased considerably, disruptions have started to occur in the supply chains of the companies. It is possible to mention about a worldwide supply chain disruption due to the interruption of international trade in the light of increasing restrictions and emergency measures in Europe. Within the scope of the measures taken in Turkey, especially in line with the statement made by the Presidency on 18.03.2020 recommended "3 weeks stay at home", the employees of the companies are willing to comply with this recommendation such as many other people, therefore the supply problems, which show its influence over the world, are reflected to our country and cause disruptions in domestic supply chains, production, and transportation field. In order to minimize potential problems in this area;

  • Supply chain stabilization can be ensured by diversifying suppliers by companies operating in the retail sector, and substitute providers who can solve bottlenecks can be preferred instead of suppliers having problems with the virus. 
  • Retail representatives other than food, health, and fast consumption can revise their supply planning and orders with the relevant suppliers within the framework of their existing contracts, with effective communication and written contract, depending on the temporary decrease in demand.
  • Multiple approaches in procurement can be adopted to search for alternative sources simultaneously.
  • Using additional production capacity can be helpful in managing fluctuations in the supply chain.
  • After examining and evaluating the inventories and sales, studies can be carried out on keeping the stock at a safe level and reducing the risk and ensuring balance.

In addition, it should be noted that the problems of the logistics sector representatives, where the obstacles that they face as a result of both the intensity and the measures in the airline, road and seaway borders increase will be addressed separately but it should be kept in mind that, retail sector representatives can also face such problems regarding logistics and customs. In this regard, it will be appropriate to manage processes in maximum communication with contracted logistics service suppliers and customs consultants.

As a matter of fact, in the Presidential declaration dated 18.03.2020 mentioned above; it is also stated that alternative channels will be developed in line with the priorities determined in both production and Retail sector against the possibility of disruption in global supply chains, and the government's approach to bring solutions to these supply chain disruptions is also important.

In this respect, the postponement of the April, May and June payments of brief tax declarations and VAT withholding as well as social security premiums shall be deferred for 6 months, which directly concern the retail sector and the shopping malls, is also somewhat relieving.

Compliance on Sole Distributor Seller Contracts in Turkey:

At this point, it will be useful to briefly mention the solution suggestions and complications that import-oriented retail representatives may experience.

Some of the Import-oriented representatives in the retail sector consist of the Sole Distributor of the major brands in Turkey and the surrounding area. In this contractual relationship, which is embodied in one of the distributorships, license, franchise or franchising frameworks, the Sole Distributor has obligations such as minimum purchase, sales in the region, and marketing expenses within the framework of the target budget during the contract period. It is obvious that these targets and obligations will be interrupted temporarily and especially “seasonally” in the face of facts such as decrease in consumer demands and temporary closure of retail points due to the Coronavirus epidemic. In order not to be exposed to any violation or dispute in terms of related Sole Distributor Contracts, retail representatives are recommended to use the instruments of effective communication and adaptation of the Contract in the light of Force Majeure or Material Adverse Change within the framework of their existing contracts with the parties that are the suppliers of the brands they represent due to the temporary decrease in demand.

As a result, we can say that the effects of the Coronavirus outbreak are being perceived with increasing severity and that every new development changes the course of the situation. Within the framework of this change, the precautions and measures to be taken by both administrative authorities and institutions should be closely monitored. By following the developments closely, we can say that, it will be the best way to analyze the negative effects occurring within the framework of mutual goodwill, contract and compliance with the most correct and effective negotiation method.