With the next rent quarter day in England, Ireland and Wales on 24 June fast approaching, the already fraught relationship between landlords and retailers is about to be tested as never before.
Retailers have lost 12 weeks’ of store revenue since lockdown began on 23 March and do not have the cashflow to pay their rents, leaving landlords at risk of breaching banking covenants.
In recognition of both parties’ dilemma, the government is creating a temporary code of practice to encourage “fair and transparent” discussions between landlords and tenants. But will it be enough to ease tensions?
Second quarter of pain
Ailing occupiers, including Primark and New Look, struggled or refused to pay rent when it was due on the last quarter day, 25 March, depriving landlords of billions of pounds in revenue. Beleaguered retail property group Intu Properties collected just 29% of rent due and Hammerson 37%, while British Land was paid only 43% of rent due between 2 March and 30 April.
Almost three months on the situation has deteriorated: the British Property Federation estimates just 15%-20% of the £2.5bn quarterly retail rent bill due on 24 June will be paid.
“We know around a third of rent was collected at the first quarter, and we expect the financial pressure to be even more acute at the second quarter payment date in June,” says Vivienne King, chief executive of retail property body Revo.
Jonathan De Mello, head of retail consultancy at property agency Harper Dennis Hobbs, agrees: “[Retailers] have literally only had a week to trade and get revenue as stores will only [begin] opening on 15 June. It will be a disaster because only 15%-20% of retailers will actually pay.”
Stephen Springham, partner and head of retail research at property agent Knight Frank, agrees that the situation is “disastrous”: “We estimated that 33% of all retailers and leisure operators paid in full in March. Our projection for June is lower than that – we think between 10% and 20%.”
Code for clarity
The Ministry of Housing, Communities and Local Government is rushing to publish a new code of practice to support high street landlords and tenants ahead of rent collection day. Created in consultation with a working group established by the government includes the British Retail Consortium (BRC), British Property Federation and UK Hospitality, the code aims to provide “clarity and reassurance” over rent payments by encouraging discussions between landlords and tenants. It will also provide guidance on rent arrears, and the treatment of subtenants and suppliers.
Expected to be announced this week, it will add to the package of protective measures introduced by the government for tenants in the commercial sector who failed to pay the March quarter’s rent, which include the moratorium on forfeiture, the stay of possession proceedings, limitations on the use of statutory Commercial Rent Arrears Recovery procedures (which allow landlords to seize property or goods in lieu of rent), and the restrictions on statutory demands and winding-up petitions.
Initially, the code will be introduced on a temporary basis, but the government has indicated it may seek to make it mandatory if necessary.
Retailers and landlords have welcomed the government’s recognition for a code.
“The code is all about good practice and together working collaboratively, which is a really good thing,” says Dominic Curran, property policy adviser at the BRC. “We have been working to get something that has some reasonable content and would be felt to be useful by the parties negotiating.
“We have not seen the draft, so do not know for certain what it looks like in its entirety just yet, but what I hope it will do will be to focus the minds of landlords and tenants who have been unable to reach an agreement.”
It is understood the BRC has called for an extension of the forfeiture moratorium in the code. The legislation prevents landlords evicting tenants affected by Covid-19, from the end of June until the end of this year.
“Sales are between zero to 20% of normal sales at best, and so the reality is that you don’t have enough cash reserves to pay a full quarter’s rent,” Curran explains. “The fallout for some retailers will depend on whether their landlords decide to sue them for rent arrears. If the moratorium isn’t extended, then there will be more CVAs [company voluntary arrangements] and associated job losses.”
One high street retail CEO agrees: “We are hoping there will be something in the code suggesting a conversation has to take place between retailers and landlords in a way that forces them to work together collaboratively. It is important for the moratorium to be extended. This gives a backdrop of confidence for retailers, and we need that to continue until things start to become more normal again. There needs to be that support.”
Melanie Leech, chief executive of the British Property Federation welcomes the opportunity to collaborate with the retail sector. However, she and other property experts believe the moratorium is biased towards retailers: “The common ground is that there needs to be a fair and equitable way of working together and mitigating the impact of coronavirus.
“However, for us, the genesis of the code is first to redress the imbalance in favour of landlords. The government took those [moratorium] actions to protect tenants. It wasn’t planning to do any more to support landlords. Therefore, we’re calling on the government to supplement the code with a Furloughed Grant Space Scheme.”
The furlough proposal is loosely modelled on a successful Danish scheme, whereby the government subsidises the rent bills of stores closed in the pandemic.
Leech adds: “We and the BRC took inspiration from a model in Denmark. The underlying principles are the same: both parties involved take a bit of pain, then the government steps in and bridges the gap. No one party takes an unsustainable part of the pain.”
One high street retail source tells Drapers a furloughed space grant scheme is “the best solution because rent expectations are unrealistic”.
Time for turnover
Meanwhile, retailers and landlords are calling for a turnover-based rent “solution” to be included in the new guidelines.
New Look, H&M Group and Frasers Group are among a raft of retailers seeking to change their rent terms to reflect individual stores’ turnovers in recent weeks. Property experts have said for this to work, retailers will have to be “more transparent” in disclosing turnover.
Mark Burlton, owner of independent retail real estate business Cross Border Retail, says: “A code of practice that encourages landlords and tenants to talk to each other, and recognise common interest, has to be a good thing. However, retailers have to play fair. If we are to move to a system of turnover-based rents, retailers have to play their part and be transparent. Where they can, they should pay what they can.”
Springham agrees: “There should be a bigger push toward turnover-based rents. However, this is very hard to implement if there isn’t transparency from retailers. They need to be more forthcoming and be transparent. This is what the code of practice should address. It requires level of trust.”
The traditionally fractious relationship between landlords and retailers has become even more strained by shoppers’ shift online, that has led to CVAs and store closures. The coronavirus has piled on extra pressure, and now more than ever finding a way to work together and support each other is essential for the future of the high street.
The government’s code of practice is a positive first step and could ensure viable businesses are not forced into administration. However, both landlords and retailers must be prepared to do more if necessary, given that the commercial lettings market is in need of wider reform.