Rocky times are a sad fact of any relationship. Even with the best of intentions, sometimes life just gets in the way. And because conditions in retail property are about as strained as they could be at the moment, for retailers and landlords alike this is one of those times.
For all the talk of keeping lines of communication open, working together and mutual interests, landlords and tenants are essentially in business to make the most for themselves. For one to get that, sometimes the other will suffer.
Footwear group Stylo’s failed attempt to arrange a company voluntary arrangement (CVA) a month ago is a sign that a new power struggle might be brewing. While even a year ago there was a degree of harmony, détente and a steady improvement in relations, now there is disagreement and frustration on both sides.
But is this just in an isolated instance or two, or will the present tough conditions have longer-lasting effects on the way retailers and landlords do business?
“I think the relationship is becoming soured by the growth of pre-packs and CVAs,” says Keenan & Co director Patrick Keenan. “There’s an increasing amount of frustration and cynicism from landlords having to deal with these requests.”
There is no shortage of people in retail property with strong opinions on Stylo’s attempted CVA. That the vote even took place was a sign of extraordinary times. That it went against the retailer was not much of a shock to many. But it has still split the industry.
An RW Online poll taken the week after the CVA collapse suggested that many believe landlords made a mistake in refusing to play ball with Stylo. But talk to anyone on the property side of the fence and they will argue that allowing it would have been a far more serious error.
When Stylo first proposed its CVA landlords were still licking their wounds from the fallout from other big retail collapses such as Woolworths, Whittard of Chelsea and MFI. At first glance, Stylo chairman Michael Ziff’s proposed solution seemed far more reasonable. But as time went on and landlords digested what the deal meant in real terms, all of a sudden it did not seem so inviting.
By the time the CVA vote came around the idea was dead in the water. Landlords, it became clear, were against the idea on several grounds.
Most felt that the deal would have put them in the unenviable position of subsidising the rest of Stylo’s creditors, who would be paid with the money the landlords would concede. And to top it off, they would be left with the retailer’s weakest stores back in their laps.
Landlords do not like taking second place to creditors that have traditionally been beneath them in the pecking order, and they certainly do not like having to take back poorly performing stores.
But for the landlords, more important than the particular losses they would have incurred by allowing the CVA to go ahead was the message that would have been sent out to the retail industry. After all, by rejecting the deal, landlords accepted that they would have to take back about 200 Barratts and Priceless stores that Stylo wanted to dump anyway. More harmful than having to take back these stores, however, was the precedent that would have been set had the vote gone ahead.
Brookfields head of leasing Tim Buckley explains: “I think landlords were sympathetic to Stylo’s position but they were worried it would set a precedent. I’m disappointed at the stance of a number of retailers in the way that they are using the present climate to create a more compelling case to landlords.”
A lucky escape?
According to Tony Lorenz, who heads Lorenz Consultancy, which advises landlords on rent reviews and other lease disputes, the fact that Stylo failed to win over the landlords should be welcomed by all sectors involved, including retail.
“I’m glad the Stylo pre-pack was not voted in,” says Lorenz. “If Stylo had sailed through, what that would have started would have been a retailers’ revolution where everybody turns around and says: ‘This is a good opportunity, why don’t we do it?’”
One consequence in particular, says Lorenz, would have been very undesirable indeed for retailers. “If landlords realise that they only have a 10-year lease if the retailer is performing well they will build that into their yield. To get a higher income they will have to get a higher rent initially. It will go around in a circle,” he says.
There are times when it might not seem so, but landlords’ and retailers’ interests are often completely intertwined. While the two might frequently quarrel over the fine details of a lease or even big issues such as how to handle a retail collapse, for each side the key is keeping the pipeline growing and healthy.
If retailers are to keep their brands fresh and attractive they need to keep updating their property portfolios. For landlords, of course, maintaining growth is about developing new schemes and keeping existing centres as up to date as they can.
John Lewis head of development Jeremy Collins warns that, for both sides, there is a danger in the present strife over CVAs and retail administrations that this crucial future pipeline might be affected.
He says: “If the retail industry behaves badly over the next year or two in the way it deals with the property sector it’s going to find it incredibly hard to get the property sector in years to come to raise the capital to invest in new space or refurbish existing space.
“Retailers royally shafting landlords could well end up impacting the sector’s ability to grow in the future. Other more stable asset classes might become more attractive to investors.”
With all the big listed landlords reporting dismal losses for the past year and all now calling on their shareholders to fork out money to keep them afloat, there are sadly no signs of improvement for this year or next. The recession is still in its early stages and there is little hope of any immediate relief. More retail administrations are now inevitable.
So landlords need to accept that helping retailers is something they will have to do for some time yet. In the cases where the relationship is good and the lines of communication are still open, this should not be an insurmountable problem. Landlords do not mind taking less rent provided that it is only temporary and a measure born entirely out of necessity.
What they do mind, says Keenan, is retailers taking advantage of landlords’ weak positions for their own gain. He says: “There is some bad feeling about the number of requests coming in from tenants for concessionary terms, pre-packs and CVAs and there is a point where landlords can’t continue to agree in every case.”
Of course, in the vast majority of cases retailers are honest and open with their landlords, and when this does happen they are right to expect landlords to budge. Too few landlords are still willing to collect rent payments monthly, at least without punitive charges being a requisite, and until more do retailers are under unnecessary pressure.
Retailers might face a frustrating battle with their landlords, but there are things they can do to help themselves out, says Collins. The key, he believes, is being honest and open.
He says: “The relationship is inevitably going to be under pressure at a time like this. Both sides are getting hit massively by the economic downturn. It’s really important that both are as open and honest as they can be. If you hide behind a veil of secrecy it makes doing business much harder.
“I don’t think it’s unreasonable for landlords to ask for all the information from retailers that are asking for concessions. The danger is that people will try to get favourable concessions without demonstrating why they need it.”
Unfortunately it has become clear that the relationship most retailers and landlords have been trying so hard to foster and improve is entering another difficult time. That there is tension is not surprising and is no cause for alarm in itself. What is troubling is when the odd landlord or retailer doesn’t play straight and tries to exploit the other’s weakness.
Retailers need to take care not to do this and not use a pre-pack administration or CVA unless it is absolutely necessary. As Lorenz explains, this is not just for the sake of the landlords – it is just as much for the good of the future of retail.
“Action and reaction are always equal and opposite,” he says. “Something has to crack. Either rents will go up or landlords won’t be able to develop their next shopping centre, neither of which is good for retail.”