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Comment: How retailers can reduce rental costs


Everywhere you look on the high street, retailers are exiting stores either to try and cut costs or because they have no other choice.

The spate of retail insolvencies continue. In 2012 we have already lost Past Times (for the second time) while Blacks Leisure, La Senza and Barratts were all bought out of administration, the latter at the expense of around 50 stores. Peacocks meanwhile are still currently in administration, leaving hundreds of surplus stores.

Even companies that are still trading are rationalising their portfolios, with Dixons having announced plans to cut a further 70 high street stores and New Look planning to exit as many as 100 units. Arcadia Group, Thorntons, Mothercare, Clintons and Thomas Cook have already embarked on a similar strategy.

According to the latest Local Data Company report, Stockport heads the list for retail voids at 30 per cent, while Nottingham, Grimsby, Stockton, Wolverhampton, Blackburn, Walsall and Blackpool all have at least 25 per cent of their shops lying empty. Leading retail estate firm British Land saw its portfolio depreciated by 0.4 per cent during the last three months of 2011 due largely to the performance of its retail estate which accounts for 61 per cent of its holdings.

The UK high street vacancy rate currently stands at 14.3 per cent which equates to around 48,000 empty shops. Prime retail centres are almost fully let; however secondary and tertiary retail centres are struggling. The north is worse than the south. There is simply too much retail space in places where people do not want to shop. Add to this recent research from Jones Lang Lasalle which shows that 25 per cent of all high street leases will expire by 2013 and 50 per cent by 2015.

It is clear that the landlord-tenant power dynamic is shifting because of this new environment. Retailers may be in a better bargaining position if they wish to stay; however, this is not the case for those wishing to go. There is little tenant demand, landlords already have too many vacant units and are likely to be faced with similar requests from other struggling occupiers.

Nevertheless, retailers should realise that now is a useful opportunity for tenants to consider how they might reduce their real estate liabilities in such torrid trading conditions. OpCapita has recently completed its purchase of Comet and as part of a due diligence exercise of its 248 stores, it is seeking to reduce its £77 million rental bill. It is likely to deploy many of the techniques I recommend below:

1) Undertake a careful review of your portfolio. Do you have surplus properties – those that are already closed or not trading so well? Identify leases coming up for expiry or with break clauses in them allowing you to terminate them early. Be careful to comply with all conditions of the break for instance, material compliance with repairing covenants. In the current market, landlords are challenging break notices aggressively;

2) Ask your landlord whether it might accept a surrender. Even if the answer is no, you may be able to negotiate better terms (see below). Be aware that significant dilapidations claims are becoming commonplace from landlords for whom redevelopment no longer makes commercial sense;

3) Consider sub-letting premises in whole or in part. This is a possibility if you want the property back in the future or if you want to trade from a smaller space. Alternatively, consider an assignment of the lease. If the lease allows subletting or assignment, you will most likely need your landlord’s permission. If the lease does not allow it, ask your landlord to vary the lease;

4) Even if you cannot find anyone to pay the rent, you may be able to let rent-free to another occupier, perhaps a charity, so that you can at least reduce your business rates liability;

5) If you are keeping the property, consider negotiating monthly rents to increase cash flow or better still a rent reduction, a rent holiday or a capital contribution. Nick Leslau recently opined that one in four retailers outside of the 50 prime retail centres are paying no rent or are heavily subsidised by their landlords. This is probably easier to achieve than walking away from the property completely. Dreams, the bed retailer, is the latest company to ask its landlords for monthly rents in order to improve cash-flow. Consider also asking for downwards rent reviews or turnover rents;

6) Consider other ways of reducing running costs. For instance, can the service charge be reduced? Is the landlord charging for items that should not be part of your service charge, for instance the running costs of empty units?

7) If all else fails consider formal restructuring. Administrations and corporate voluntary arrangements (CVAs) are insolvency processes designed to allow companies to off-load their liabilities and may be an extreme possibility in the absence of agreement. Administrations allow companies to trade out of difficulties whilst a buyer is sought. The frequent outcome is an asset sale to a newco. Landlords are then faced with an unauthorised occupier that they can choose to accept or a vacant property. CVAs usually involve landlords being offered a premium, often six months’ rent, in exchange for a release from the lease. If 75 per cent of a company’s creditors agree, all creditors are bound by its terms.

Unfortunately there is no quick fix to the current retail woes and it is likely that we will continue to read of retailers using these sorts of tactics to try and reduce their retail estate liabilities over the coming months and years.

Caroline DeLaney is Head of Real Estate Disputes at Kingsley Napley LLP

Published on Tuesday 14 February by Editorial Assistant

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