Negotiating a new, more advantageous lease agreement with a landlord could give retailers crucial breathing space if their sales are suffering in the downturn
Retailers and property owners are increasingly working together to create lease agreements that are more affordable and flexible. Every situation is different but three criteria generally dictate a retailer’s ability to negotiate a deal: who they are, where the shop is located, and whether they are locked into their agreement.
Those approaching lease renewal or break clauses are in a stronger position, says Mark Chapman, managing director of retail property adviser Chapman Consulting. But he stresses: “If you are locked into your lease, still go and talk to your landlord. There are landlords that will listen.”
Property owners say early dialogue with tenants is crucial if problems are developing. British Property Federation (BPF) policy officer James Anderson says: “If a retailer is in trouble and experiencing cash flow difficulties, it is better to speak to the landlord early in the quarter-paying day period.”
Ronan Faherty, commercial director at Land Securities, one of the country’s biggest retail landlords, adds: “There is no point in a retailer coming to us with a massive problem. By then it may be too late to resolve it.”
Many in the property industry believe there is a growing level of collaboration between landlords and tenants.Keith Mabbett, senior leasing director at shopping centre developer Westfield, says: “Previously the deal was based on a bargain over price. That created a tension. Now that is changing. To sustain a business you have to understand your customer and for us that’s our retailers. The key is to strike lease terms that meet our needs and their needs.”
For any retailer - particularly small indies - negotiating a new lease agreement isn’t easy, so the BPF stresses the importance of good advice. It advises retailers to use an agent - preferably one that supports the Commercial Landlords Accreditation Scheme, a self-regulatory scheme for landlords that promotes good practice in the property industry.
Those negotiating a new lease should also bring in legal advice at the heads of terms stage before signing anything, advises Amelia Douchet, a solicitor in commercial property with law firm Thring Townsend Lee & Pembertons. “This saves time and money,” she says.
Ruth McCarthy, commercial property expert with law firm Slater Hellis Collier Littler (SHCL), recommends retailers speak to a local property agent.
Other types of support and advice agencies are emerging that can act as intermediaries when it comes to negotiating with a landlord. North-west based Commercial Plus, for example, can help retailers already locked into leases to renegotiate their terms.
One of the biggest issues during the current trading difficulties is the monthly payment of rents instead of quarterly. It is something an increasing number of retailers want to talk to landlords about to help ease cash flow.
Jane Milne, director of business environment with trade body the British Retail Consortium (BRC), says retailers wanting monthly payments as part of a new lease are generally successful in securing such a deal. But retailers with existing leases face more challenges in terms of negotiating monthly rents.
The BRC has set up a dedicated advice website at www.brc.org.uk/rentmonthly. This includes a template letter showing how to approach a current landlord to make a request for monthly payments.
Landlords are being proactive on the issue. Late last year, a band of them joined together and, working with some leading high street retailers, launched a monthly payments initiative. Those with three shops or fewer and paying £50,000 or less in rent on each property have the option to pay rent monthly - permanently. The only provision is that retailers must pay by direct debit.
One participating landlord, PRUPIM, has since gone further and initiated a temporary facility for most of its retail tenants if they wish to pay monthly rents. The scheme began in March and runs for a 12-month period.
Retailers renting space from other landlords will also find them more willing to discuss a short-term move to monthly payments - if the figures stack up. Landlord Hammerson’s group retail leasing director Sheila King says: “If we get such a request we need three years profit and loss accounts. We then want to meet with them. If there is a case to answer we will offer them monthly rents - with a 1% charge - for a set period which will vary on a case-by-case basis.” Westfield also deals with requests from retailers on a case-by-case basis.
Rent-free periods can now form part of a new lease agreement and SHCL’s McCarthy says this is a valuable tool. Six months rent free should be a “starting point” for negotiations.
There are other rental payment arrangements that could be open to fashion retailers. Especially helpful to newer businesses is a stepped approach. As Mike McElhinney, a retail expert with property consultant King Sturge, explains: “A business may start up, expecting to take two years to get to its optimum trading potential. If the rental value of the property is £30,000 per annum, it may be possible to pre-agree that the rent goes up in tranches.”
Base and turnover rents are another option, whereby the turnover element of the bill reflects the level of trade being sustained - both up and down.
Lease lengths have generally shortened to seven to 10 years. But it is still vital to consider how soon and how frequently break clauses should be inserted into the agreement. This provides a vital exit route if things are not working out.
With access to working capital proving difficult, more retailers may need or want to negotiate contributions to shopfitting costs. And again, landlords say they are willing to discuss these. However, some will still seek a strong covenant and many will want a level of financial transparency from the retailer.
Negotiating better lease terms is still a tough, commercial process but there is growing evidence of co-operation, understanding, and transparency between the two sides involved.
Peacocks makes a deal
Value chain Peacocks is continuing to expand its store portfolio and recently acquired six former Woolworths stores.
Group operations director Neil Burns says negotiations over the stores were held directly with the landlords - in each case the units having been handed back by Woolworths’ administrators. More deals on ex-Woolworths stores can be expected in the future.
“It’s a dialogue over how we can reach a mutually beneficial agreement,” says Burns. “For a landlord we are a good covenant going forward. But the first question we have to ask is: ‘Is a store in the right location?’ Even with a softer deal on offer there are some we still walk away from because they would be too risky.”
Burns says Peacocks’ typical requirement for some time has been a 10-year lease with a five-year break - and that’s usually what it gets.
“What we do now look for is a capital contribution to fit-out, which we prefer, or a significant rent-free period.”
WRITTEN BY ELAINE CAVANAGH