Rent cuts & the tough relationship between retailers & landlords

Retailers are increasingly seeking rent reductions on shops up for lease renewal as rivals cut rents using CVAs. Does this mean retailers struggle in paying a fair rent in relation to their rivals? Will the retail industry find itself losing out as property investment declines in the long term?

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Retailers are increasingly seeking rent reductions on shops up for contract renewal as rivals cut rents using CVAs.

It’s no secret that a recent flood of rent reductions and store closures has plagued the UK’s retail industry this year, against a backdrop of dwindling footfall and sales, declining consumer confidence and soaring business rates bills.

This has placed pressure on landlords who are now scrambling to avoid vacant units across their estates.

While many of these store closures and rent reductions were undertaken as part of a CVA process, an increasing number of retailers are seeking rent reductions in its own right – without a clear restructure or cost-cutting scheme.

This raises the question as to whether retailers are trying to foolproof their business in a bid to stave off a CVA.

“Recent CVAs have given many solvent tenants an appetite for seeking their own rent reductions”

Dan Sweeney, partner at UK law firm TLT, said it was understandable that retailers in certain locations would pursue this tactic.

“In circumstances where some retail locations are suffering from what is now an over-supply of retail space, it is natural that retailers in those locations are seeking to extract a lower rent,” he told Retail Gazette.

Lisa Raymond, a commercial property lawyer at Keystone Law, argued that many properties are over-rented, and the stress shows once the retailer moves in and trades.

“It can’t absorb the expense and so seeks the rent cut,” she said.

In February this year, Monsoon Accessorize asked landlords for reduced rent bills, as it was considering “accelerating” its store closure programme after a tough trading period.

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In July, Monsoon Accessorize had its rent bills slashed after landlords voted in favour of rent reduction proposals

The group’s German division filed for insolvency in the same week, which manifested the retailer’s financial strain.

At the time, a company spokesman told The Mail on Sunday there were “no plans” for a CVA.

However, in June the fashion retailer launched one – although its CVA proposal did not include store closures or job cuts, as they normally do.

Instead, it asked landlords to approve of rent reductions across 135 of its stores – more than half of its 258-strong estate. Monsoon also offered landlords up to £10 million if the business went on to trade profitably in the future.

In July, the landlords voted in favour of the rent reductions in the retailer’s CVA proposals.

Sweeney argued that the rent reductions attached to the recent spate of CVAs have given many solvent tenants “an appetite for seeking their own rent reductions, on the basis of a direct rental comparison”.

Indeed, in the same month that Monsoon’s rent cuts were approved, Primark called on landlords to cut rent costs by 30 per cent – but with no CVA in sight.

The Sunday Times reported that Primark was seeking reductions on stores where leases had several years left to run, and it was offering to invest in refurbishment.

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Primark called on landlords to cut its rent costs by 30% as a result of competition pressure

One of Primark’s landlords said the retailer’s property team was reportedly told to obtain rent reductions as a result of pressure from competitors.

Other retailers seeking rent cuts in the past few weeks include Clarks, Ann Summers and River Island.

In early August, Mike Ashley’s Sports Direct, which bought Jack Wills for £12.8 million as part of a pre-pack administration deal, asked landlords to accept rent-free tenancy agreements on some of its worst-performing stores.

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Jack Wills’ new owner Sports Direct pushed for zero-rent on the worst-performing stores

It offered landlords five per cent of turnover on most of its 100 stores and reportedly closed eight stores.

In mid-August, River Island began negotiating with landlords over cutting store rents by up to 40 per cent across the majority of its 270-store estate, while in marginal locations, it was looking to establish turnover-based rent deals of up to 12 per cent.

Later in August, Ann Summers won better property terms from landlords on most of its 100-store estate, although a CVA remained likely if property owners refused to be more flexible.

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Ann Summers’ CEO Jacqueline Gold said its rent cuts were as a result of tough trading conditions

Ann Summers chief executive Jacqueline Gold admitted that the retailer was seeking rent cuts as a result of changing consumer behaviours amid tough trading conditions.

In the same week, shoe retailer Clarks was reportedly asking for rent discounts of up to 30 per cent, and in return offered to extend leases in some of its stores.

Despite retailers attempting to foolproof their businesses, Raymond argued that rent cuts won’t stave off a CVA, and is “one of the expenses that a tenant looks to bring under control when the business is stressed”.

It’s undeniable that retail leases come with risks for both the landlord and the tenant.

Landlords must set rents at the right level – one which gives them adequate returns without overburdening the tenant – then hope that the tenant trades well enough to meet obligations.

A number of landlords operate on a turnover-based model, which offers an alternative to open market leases and can mitigate against the risks of both sides and potentially benefit both parties.

“The benefits of a rent linked to revenue are clear for a tenant,” Sweeney said.

“Provided that a retailer is well advised on the percentage they are able to share with the landlord, they are only paying rent once a level of income is achieved that delivers an acceptable return at that location.

“A turnover lease is not a remedy for a wider malaise of unfair rents”

“The expectation is that this will then result in more sustainable retail businesses delivering landlords less void units and a more reliable rental yield.

“However, the lack of certainty of income is an issue for many landlords.

“Many retailers are also reluctant to share financial data across their store estate for fear of this being used against them by landlords in negotiations at other locations.”

Jonathon Waterhouse, commercial property solicitor at law firm Stephensons, argued that a turnover-based lease was “not a remedy for a wider malaise of unfair rents”.

One retail precinct which operates on a turnover lease is Wembley Park’s London Designer Outlet (LDO), owned by real estate firm Quintain.

“In terms of alternative models to paying rent, the current economic conditions are challenging,” Quintain retail director Matt Slade told Retail Gazette.

“We’ve used turnover-based rents at LDO since it opened in October 2013.

“The result has been a healthy working relationship with all our retailers, including Converse, Nike, Kurt Geiger, Superdry, Guess, Gap, Lee Wrangler, Lindt, Clarks, M&S and Beauty Outlet.”

Slade also argued that retailers and landlords both benefit financially from the turnover-based model.

“LDO has now achieved 22 consecutive quarters of year-on-year growth,” he said.

“For the months of June, July and August, total revenue grew by 9.2 per cent year-on-year.

“These results emphasise the benefit of turnover-based rents for landlord and retailers.

“However, if a retailer hits a bad patch, we’re both incentivised to see improvements through additional marketing and guidance.

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London Designer Outlet owner Quintain has operated on turnover-based rents since it opened in October 2013

“This means the landlord and tenant share the risk but both benefit from the subsequent success and growth.”

Evidently, retailers are seeking rent reductions on shops up for contract renewal, and many of them are as a result of competition pressure.

Arguably, it’s a common misunderstanding that they’re insolvent or they’re heading for insolvency unless they take out a CVA.

Although retailers can push for success through a CVA, it’s often likely that the issues are down to product and location rather than rent.

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