The debate over quarterly rents has pitched landlords against tenants, but the new president of the British Property Federation maintains that relations are better than ever. Tim Danaher meets him.

The stereotype of property developers as brash, exuberant characters is, more often than not, spot on. Francis Salway, however, is different. Calm, measured and intellectual, the Land Securities chief executive personifies the new image the property industry is keen to promote.
His reputation for coolness under fire is likely to be sorely tested in the year ahead as he juggles his role as boss of the UK’s biggest property company with his new position as president of the landlords’ trade body the British Property Federation (BPF).

The start of his year in office has coincided with the biggest flare-up between retail landlords and tenants since the Government threatened to legislate against upward-only rent reviews five years ago. Earlier this month, about 20 of the UK’s biggest tenants joined forces to demand an end to the long-standing practice of paying rent quarterly in advance – a number that has since doubled. Among their ranks are some of the high street’s biggest names, including Sir Philip Green’s Arcadia, Lord Harris’s Carpetright and other non-food giants such as DSGi, Kingfisher and Argos. Their argument is that they pay all of their other suppliers in arrears, so why should landlords be any different?

The BPF is in consultation with members about its official view on this issue, but Salway claims that the property industry has previously shown itself to be willing to discuss monthly rents on new leases and to meet with retailers that are in trouble. But he says that it is likely that landlords will be unwilling to switch to monthly payments on existing leases unless some form of compensation is offered.

“It is always the case that when you enter a downturn some retailers ask for monthly rents, and our track record of doing that for companies in difficulty is pretty good,” he says. “But we can’t justify a change to an existing contract without some form of counterbalancing compensation. Otherwise, you’re looking at a straight value transfer and I do not see an awful lot of grounds for that.”

Salway fears that monthly payments could jeopardise smaller landlords’ cash flow, while benefiting major retailers. He also argues that if landlords were to lose the security of getting rent quarterly in advance, they would be more likely to demand rent deposits from smaller retailers, which could adversely affect their cashflow and, consequently, their ability to trade. “It would be a great shame if a campaign by profitable, larger retailers were to have such an unintended consequence for small retailers,” he says.

Salway also points out that while major property owners such as Land Securities have invested in financial systems to facilitate monthly payments, some retailers that have been granted such payments have found their systems unable to cope.

With the BRC also now calling for monthly rents on existing leases, it is clear that retailers are eager to resolve this issue before next month’s quarter day rents are due. Salway says the BPF is trying to set up a meeting with retailers to discuss the issue. He cites the setting up of the lease code as evidence that the two industries can find common ground, but all the signs are this will be their biggest challenge yet.

Flexible friends

While the row about quarterly rent payments has dominated the agenda, Salway is keen to highlight how landlords have made more flexible terms the norm over the past decade. He points to figures that show that the average lease length has fallen from 19 years at the start of the 1990s to seven years in 2006-07 – the last period for which figures are available.

On bigger units, typical leases are now 10 or 15 years, with 10 years becoming usual on new developments, while five years is becoming normal for smaller units, removing the issue of a rent review. “This is the biggest change since I started in property in the late 1970s,” says Salway. “In the 1970s and 1980s, everything was on a 25-year lease.”

Salway believes the next stage in the evolution of the lease will be the increasing harmonisation of terms internationally. This could be a mixed blessing for retailers because, although leases are generally shorter on the Continent, the annual inflation-linked uplifts in rent would mean occupiers would no longer benefit from paying below-market rent in the years immediately before a rent review.

Salway is proud of the success of the Commercial Landlords Accreditation Scheme (CLAS), a kitemark for landlords that shows that they are willing to follow the 10-point lease code and sets down procedures for agreeing new leases, including a complaints system if tenants are unhappy.
CLAS has 34 member companies, accounting for 400 million sq ft of property throughout the UK. That includes three retailers – B&Q, Next and Travis Perkins – that agree to use it when they are subletting space to other retailers.

Salway says he would like to see more retailers sign up, but the bigger issue for the stores sector is that the growth of private investors as owners of shops means that wealthy individuals control more of the stores they occupy than the major property companies or institutional investors. This particularly affects retailers such as Boots and Woolworths, which have large numbers of stores in secondary locations.
Acknowledging this is an issue, Salway says that the BPF has sought to get major agents and solicitors on board, too. In the past six months, The Law Society has been persuaded to adopt the terms of the lease code in its standard lease, which means its members should increasingly use it when drawing up leases on behalf of small members.

Although this is an example of landlords responding to pressure from tenants, Salway is keen to identify areas where there is common interest. One such issue is the Government’s universally condemned decision to impose full business rates on empty properties after three months. “It’s a tax on hardship,” he says. “By and large, empty buildings don’t use public services.” The BPF is working closely with the BRC and CBI to lobby on the issue.

If there’s one consolation for retailers amid the economic downturn, it must be that landlords are probably having an even worse time than they are. Tenant demand has slumped, investment values have fallen and new accounting rules have led many of the biggest property companies, such as British Land and Liberty International, to report massive losses in recent weeks. This has happened as many major schemes are nearing completion. This year, projects have opened in Liverpool and Cambridge, and others are set to follow this autumn in London, Bristol and Leicester. Salway says that schemes in big cities with the right sized units are doing well. He insists that even Land Securities’ schemes in smaller towns, such as Corby and Livingston, are letting too.

Survival of the fittest

But aside from the, hopefully temporary, issue of the credit crunch, a bigger spectre looms. While multichannel retail presents challenges for all retailers, if the internet continues to grow share the biggest losers will be the owners of shop property.

“We are dependent on growth in sales through bricks and mortar to drive rents, so it has to be an issue,” Salway admits. He says that commercial landlords can deal with this in two ways – by creating a leisure experience in their retail destinations, or by offering convenience. He cites Land Securities’ Gunwharf Quays development in Portsmouth as an example of how the best new schemes combine retail and leisure to create a day out. Salway argues that the social element of a day out shopping will ensure its continued survival.

“In the 1990s, people said offices would be dead, but the reality is that people like the social interaction. Shopping is about interacting,” he says. “For young people, going out to a shopping centre is like stepping out onto the dancefloor.”

But to make these destinations work, both retailers and landlords need to create quality environments. That’s why companies such as Land Securities will now go to much greater lengths to understand its clients – for example, its recent appointment of former retailer Ronan Faherty as commercial director.

Partnership is an overused word these days, but it will be essential if tomorrow’s retail destinations are to successfully ward off the challenges presented by the web. It will also be crucial if the row over quarterly rents is not to overshadow the real progress made in the landlord/tenant relationship over the past decade.