One way of spotting a serious recession in the commercial property market is the inevitable whining and moaning by retailers about the rental obligations of their premises. It’s happening again, with a concerted effort by the British Retail Consortium to change the way retailers pay rent.
I recollect back in the mid-’70s sitting in a packed hall at the R.I.C.S. to hear a presentation from retailers asking for rental holidays and/or reductions in order to be able to survive a tough recession. There was a suggestion from a surveyor working for landlords that retailers who could no longer afford rents on prime locations should move to cheaper, less well located premises – a suggestion that produced incredulity from retailers who clearly felt that signing a 25 or 35 year lease (there were still 35 year leases with 7-yearly rent reviews in those days) gave them a ‘ right of residence ‘ and if they could no longer afford to pay the rent, the landlord had to make concessions to permit them to stay in their premises.
Discontent was raised again at the next recession, particularly about upwards-only rent reviews, which was also an issue in the early ’90s recession. Then, the B.R.C. had their greatest success. Again they complained: this time about residual liabilities after retailers have assigned their leases to other retailers. At the time many smaller retailers were going out of business and landlords were reverting to demanding rent from the original signatory to the lease. Retail chains who had moved premises as they had expanded and/or abandoned the High Street suddenly faced rent demands for premises they used to occupy, as well those they currently occupied.
The Government succumbed to the political pressure and changed Landlord and Tenant Law to suit the tenants. Public sympathy was very much on the retailers’ side, partially because of Press support, who failed to educate the public about the other side of the debate. What outsiders fail to appreciate is that retailers have a number of options if they want to leave their premises: they can offer to surrender their lease to the landlord (which can produce costs for the retailer), sub-let or assign their lease to another retailer. Usually, the incoming retailer will pay a premium (a capital payment) for the lease, which can be quite substantial. It is often expressed as for fixtures and fittings (for tax reasons), but few retailers make use of the previous occupants fixtures and fittings. It’s a payment for the difference between the market rent and the (lower) rent payable under the lease. It’s borne out of the anachronism of having rent reviewed to market levels at long intervals. In effect, it’s part of the landlord’s equity.
The change in the law made a colleague of mine at the bank at which I worked apoplectic. He was in charging of Leasing Finance (not real estate, but plant, equipment, car fleets etc). He saw it as a fundamental change in contract law (which it was), as it permitted one party to a contract to walk away from their obligations under the contract. No doubt he was concerned about it gradually infecting other areas of contract law, but, as he said: “Why should property (real estate) be an exception ?”.
My reaction was at the lack of quid pro quo for landlords. The most obvious change would have been to stop tenants being able to charge premiums for assigning their leases, or at the very least force them to share a major part of the payment with the landlord.
Now, I have no problem with changes to real estate leasing, so long as it is fair and the benefits are shared between landlord and tenant. Retail tenants complain about their lot in the middle of a recession not just because they are suffering, but because there will be little focus on how much retailers benefit from their lease arrangements in boom times and also because their bargaining strength is at its greatest in a recession.
The B.R.C. wants rental payments to be switched from quarterly in advance to monthly. Apart from the increased administration costs of doing that for both parties, I have no problem with the change, so long as there is a change that benefits landlords, such as annual rent reviews or sharing of assignment premiums.
We’ll watch what happens. In the meantime, I mentioned this to a friend who has been in property management for over 40 years. Her response ? “Does this mean I’ll be sending the bailiffs in monthly now, instead of quarterly ?”.