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Talking Business: 'Landlords and tenants need leasehold reforms'

John Kelly is regional managing partner at insolvency specialist Begbies Traynor.

 

John Kelly

John Kelly

While many larger fashion houses are benefitting from the improving economy, some are still struggling, as demonstrated by the failures of Bank and the restructuring of Austin Reed just one month into 2015. Whatever our views about their respective offerings, the problem they share is an excess of retail outlets. Despite the improved economic outlook, landlords still have many vacant properties and numbers will only increase following these announcements.

Bank was placed into administration, while Austin Reed is seeking to restructure through a Company Voluntary Arrangement, which can allow a business to survive by agreeing with its creditors a reduction or time to repay the creditors. A significant part of Austin Reed’s restructuring involves a reduction in the number of leasehold properties.

But there is a remedy that could help both landlords and retailers.

If you are looking to enter the retail fashion sector, landlords will ask for anything from seven- to 21-year leases, often with personal guarantees. The situations of Bank and Austin Reed would have been improved by the ability to exercise break clauses in their excess leases. A break clause allows a tenant to return the lease to the landlord under certain conditions.

If there were maximum time limits for break clauses to be implemented, existing retailers could manage their property portfolio more efficiently and new entrants could take on leases with less risk. Such a change could allow retailers to more effectively match their properties to their business and avoid potentially expensive restructuring procedures. It would also lower the barriers and costs of getting started in retailing and benefit landlords who need to work with larger tenants to make better use of their vacant properties.

Until there is a reform of leases, retailers will continually find themselves forced to restructure, as some of their outlets become unfashionable or product ranges change and are no longer appropriate for the locations.

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