The retail property industry must let go of upward-only rent reviews if shops are to survive after coronavirus, argues Mark Burlton, managing director of independent retail real estate business Cross Border Retail.
UK shopping culture is standing on the precipice and looking down. The Covid-19 pandemic comes on top of years of systematic failure, which has resulted in numerous company voluntary arrangements of varying success, bankruptcies, a disappearing supply of new brands willing to take on physical stores and the subsequent collapse in value of our big retail landlords.
This undermines the very fabric of our society and, in particular, our need to socialise. Our towns and cities are built around our retail hubs and if we lose them, we risk far more than losing a few shops.
It doesn’t have to be like this.
On top of the highly necessary government emergency legislation and the intense discussions that are no doubt already under way between landlords and tenants, we have to take this opportunity to change forever a leasehold system that stems from 1954 – three years before The Beatles played their first gig.
At the very heart of this impending catastrophe is the upward-only rent review clause
UK lease law is a long-winded, expensive, inflexible system. It needs to be replaced as soon as possible by something that embraces modern retail, allowing all retailers, regardless of size, to pay a rent they can afford and landlords to properly value their assets with a view to future growth.
At the very heart of this impending catastrophe is the upward-only rent review clause – a uniquely British but universally unfair system of rent fixing.
You could never require a motor manufacturer to produce a car that only had an accelerator and no brake. Such a car, once it hit the national speed limit, could never slow down, let alone stop, until it crashed or ran out of fuel.
Yet this is what we require our retailers to do: renegotiate rent downwards at the end of the lease if you can, but otherwise carry on until you can’t. Even brands currently enjoying success will hit the buffers before too long.
We cannot wait until the end of every lease to rebase rents: too much will have been lost by then. We need a system now, backed by government legislation, that transfers all rent payments to turnover percentages but with a kicker for landlords to reflect domestic online sales, some of which must be attributable to physical stores.
This will require the absolute co-operation of all retailers, some of whom have been historically shy about sharing their numbers. This can’t continue. Audited store performance data is readily and immediately available, and it will allow landlords to receive fair rents as well as provide essential trading information to prospective new tenants. God knows we will need new brands to enter the market with a degree of confidence that they can survive.
All new leases should be fully negotiable in five days, not five months, and associated costs should be insignificant. There can be no “side letters” or other means of deliberate obfuscation. [Side letters are commonly used by landlords and tenants to modify the terms of a lease on or after completion.]
If the retail sector is ever to be investable again, it has to be given the chance to grow.
Last, we need to address business rates. If the declaration of audited store turnovers is compulsory, then business rates can immediately be pegged to annual trading figures that respond in real time to market fluctuations. A summer intern at the Valuation Office Agency ould work out how to do that. The government only needs to set the rate in the pound depending on their fiscal needs.
If the retail sector is ever to be investable again, it has to be given the chance to grow. This can only be achieved if shops are allowed to pay what they can afford and landlords receive what they are entitled to. However, change requires upheaval and we need industry bodies such as the British Retail Consortium and Revo to meet on a Zoom call, and agree a mutually beneficial strategy for lobbying parliament. Now.
Mark Burlton is managing director of Cross Border Retail. He previously led the global cross-border retail teams at Cushman & Wakefield and CBRE, and was EMEA real estate director for Foot Locker and Polo Ralph Lauren