It’s a renters market, is the “tail wagging the Commercial Landlord’s dog?”

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Rent paid in Arrears:

Given the toughest
trading conditions in living memory on Britain’s high streets – in
fact the trading conditions in retail are probably unprecedented –
tenants, at least those with a reasonable chance of surviving the
online onslaught, are beginning to “flex their muscles.”

It’s a tenant’s
market, where to some extent, lease terms permitting, they can
dictate conditions to their landlords, some of whom are struggling
themselves.

Intu, the leading shopping centre owners, for example, have just announced the possibility of a £1bn cash call on their shareholders. The debt-laden company, owners of shopping centres including the Trafford Centre in Manchester and Lakeside, among others, has announce it is in serious discussions with its major shareholders. These include The Peel Group, and recent investors including the Hong Kong-based Link Real Estate Investment Trust.

As retailers go into
administration, CVAs, and close down, others are rationalising their
estates by closing unprofitable locations. Property values and market
rents meantime are falling, given the mounting vacant spaces
appearing on the high street.

Whilst many stores
are over-rented (paying above the current market rent), due to the
long-term nature of business leases, some locations are tied-in for
some time and therefore their tenants are looking for other ways to
protect their cash-flows.

One way of doing
this, as WHSmith is attempting, is to agree with their landlords to
accept rents in arrears, as opposed to the time old industry practice
of quarterly rents in advance. The successful national stationery
chain is reported (Sunday Times 9^th February) to be
asking landlords to make the switch from advance to arrears.

There’ no law that
states rents must be paid either way, it’s purely a matter of
convention, and indeed residential rents are almost always paid
monthly in advance. How rents are paid – monthly, quarterly,
advance or arrears – is a matter for negotiation between landlords
and tenant; its contractual not a statutory requirement. In normal
circumstances when there is competition for rentals between tenants,
as is currently the case with residential, it’s a way for the
tenant to quickly secure a tenancy.

But not so in
retail; it’s not normal circumstances. So unless the property is in
a highly desirable location, commercial landlords may be coerced into
agreeing more tenant friendly terms: lower rents, monthly payments
instead of quarterly, short leases, or as in WHSmiths case, payments
in arrears. These demands will undoubtedly put landlords themselves
under more financial pressure.

According to the
Sunday Times, WHSmith already pays rent in arrears on several
large high street stores, and secured rent cuts averaging 35% on
leases renewed last year. Given the continuing tough trading
conditions and the shrinkage of many retailers estates, competitors
are likely to follow suit with cash saving demands on landlords.

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