As retailers prepare to take on the might of the landlords over the issue of quarterly rents, Ben Cooper assesses what they’re up against and the likelihood of their success.

Leading store groups’ decision to band together and fight landlords over quarterly rents has sent the retail property world into a whirl since news of the campaign emerged last week. And the names involved are among the most powerful in the industry – Sir Philip Green’s Arcadia, Next, B&Q, Carphone Warehouse and Boots to name just a few.

Such a formidable alliance has brought forward a debate that has long been simmering. The frequency of rent payments is an issue that has been a sticking point between retailers and landlords for decades, but the near unprecedented clubbing together by store chiefs to address the problem head-on has injected new urgency into the debate.

However, it is too early for shopkeepers to toast the fall of the hated quarterly rental regime – success is not a given for the rebel retail alliance. While there is strength in numbers, there is little anyone can do about a lease once it has been signed, without the goodwill of the landlord. And if this band of retailers is getting set for a showdown, it is unlikely there will be a great deal of goodwill flying around. While some big property owners say they will grant monthly payments on new leases, they are furious that retailers are trying to get payment arrangements changed retrospectively on existing leases.

That said, open conflict is not necessarily what either camp wants. In cold trading climates, a lot of energy and expense can be wasted if the tenant/landlord relationship becomes too strained – and at the moment many retailers are keeping their heads down and focusing on their core business operations.

But retailers feel hard done by under the present system. Paying rents quarterly in advance costs more overall and can place retailers under enormous cash flow pressures.

This is doubly frustrating because only in the
world of property renting are payments expected to be made so far in advance. The fact that property is most retailers’ second highest cost makes it appear a particularly iniquitous system.

Matalan property director Jonathan Spaven says a showdown has been “brewing for years”. He explains: “No one else pays three months in advance for anything. Paying monthly would be far more equitable.”

The British Retail Consortium, which has been fighting the cause of monthly rents since 2006, estimates that paying rent under the existing system costs retailers an extra£145 million a year. Landlords, the direct beneficiaries, gain extra revenue simply by having the money in their coffers for the three months and enjoying the resultant interest payments in the meantime.

Martin Meech, Travis Perkins group property director and chair of the BRC property committee says: “The present trading environment is very tough for many retailers, not simply a few individual companies. Monthly rents should be standard where it fits with an occupier’s business practices and we should not have to wait for new leases and renewals to modernise the market.

“Through the BRC’s two year campaign on this issue, monthly rents have started to become accepted as modern and equitable by many in the industry. We will continue to encourage major landlords to lead the way and agree to an immediate change on all existing, as well as new, leases.”

But while the BRC has been fighting the cause for two years now, the new rebel group hopes to win even more concessions for retailers. Where the BRC’s campaign has in the most part been focused on new leases, the retail rebels are urging landlords to tear up existing contracts mid-stream.

Retailers’ new willingness to confront the property establishment is a bold move that flies in the face of convention, but one that many argue is justified given the conditions many retailers are facing. As the wider economy suffers the impact of rising fuel and food prices and the continuing credit crunch, retailers have felt the full brunt of it.

If confirmation was needed, it came last week with a dismal set of figures from the Office for National Statistics revealing that retail sales growth plunged 3.9 per cent in June – the steepest fall since records began 22 years ago. Retailers have been falling into administration on a weekly basis.

However, changing a practice as entrenched as the rent system brings with it a swathe of legal issues. Despite the prolific publicity retailers have attracted, landlords are remaining fairly resistant on the whole.

With the advantage of being able to point to the law, it is hard to argue with landlords on the technicalities, however iniquitous the system may be. “Existing leases are concrete and landlords don’t have to change anything about them if they don’t want,” explains Graham Wilson, partner at law firm Barlow Robbins. “Many landlords will talk to tenants about paying monthly rents, but if the landlord says no, that’s the end of the debate.”

And, with landlords under no obligation to change the terms of a lease half way through the contracted period, retailers that refuse to pay the next round of rents on September 1 – which some think could be a possibility – risk complicated and costly legal action.

However, by teaming together, retailers’ strength in numbers and the sheer scale of the fight might just force landlords to think again. And it has to be remembered that not only has the idea of monthly rents been around for some time, but so has the practice by landlords of agreeing to them. Monthly rents are actually fairly widespread already and can be as simple to introduce as a couple of letters exchanged between landlord and tenant.

Yet it is only in certain circumstances that a landlord will allow a tenant to pay in this way. A retailer might have to demonstrate the need for some relief because of poor sales and profits and even then it is still up
to the landlord’s discretion. Landlords have been willing to acquiesce in many cases because they want their tenant to stay afloat and the alternative is losing
them altogether.

With retailer demand as weak as it is at the moment and the pressures landlords are facing to keep units filled, they will want to safeguard themselves against losing tenants in the coming months, so are naturally more likely to be flexible.

British Property Federation chief executive Liz Peace says: “Any retailer in trouble should speak directly to their landlord, which will deal with issues on a case-by-case basis. It’s simply not in a landlord’s interests to see a tenant go under and everyone realises that, for the benefit of long term business relationships and economic vitality, leases need to be flexible.”

In fact, from a landlord’s perspective, it is a sore point that their attempts at flexibility and a genuine desire for a happy business relationship is apparently going unrecognised by so many retailers. Indeed, some of the biggest commercial landlords – including British Land, Prupim, Lend Lease, Crown Estate, Hermes and Capital Shopping Centres – are willing to show flexibility and offering monthly rentals, according to the British Property Federation.

Property giant Land Securities, for example, says it has taken steps to build bridges with its retailer tenants and works to create a less adversarial relationship for both parties. Land Securities commercial director of the retail portfolio Ronan Faherty says: “I’m a bit surprised about what’s happened. It’s unfair because it gives the impression no landlords are flexible already. We have a series of consultation groups in place to discuss with retailers how best we can do business together for everyone’s interest.

“It’s about trying to understand what the challenges are from retailers’ points of view and how we can adopt a better approach – that was done well before this broke.”

Whether or not the rebels will succeed is impossible to predict. While rhetoric and bold statements have been made, the details of how action will be taken are not clear. Talk of reforming the rental system will be music to the ears of many retailers, but words and actions are two very different things and there must be a degree of scepticism about how successful the group can be.

But bold moves make history and the fact that so many of the biggest retailers in the business have teamed up is unprecedented.

While everyone waits with bated breath to see exactly what Green and the rest of the rebels are planning, the question is how far will they go to win the battle? If direct action in the form of withholding rent is on the cards there are risks, but the potential prize is a big one.

Retail Week readers speak out

A representative selection of comments on our monthly rents news story from the Retail Week inbox:

“I am finance director at The Officers Club. We run 150 stores in the UK. Two years ago I wrote to all our landlords asking for help in the form of monthly rent in advance. I have to say that at that time one or two agreed to my request and we still run monthly payments with them. The majority didn’t even bother to respond. We are not a member of the BRC, but I wholeheartedly back the campaign.”

Neil Wilson, The Officers Club

“Retailers unite against landlords - it’s about time. I have a small business in Manchester and after some considerable time and much complaining, I managed to get my landlords to accept monthly rent payments. It has helped my cash flow considerably and removed a huge amount of pressure. Also, the landlord now has a much clearer view as to the strength or weakness of a tenant’s businesses, because any problems are now apparent within one month.

“However, it’s not only with regard to rent payments that landlords should be brought into the 21st century. Rent reviews should be legislated in order to stop unscrupulous and unprofessional landlords from using upward-only rent reviews as a way of effectively stealing tenant fit-outs by demanding way over the top increases. This causes smaller businesses to lose large sums of money, having to pay for expert help at rent tribunals or even shut down their businesses because the rent increases make the business unprofitable.

“Perhaps in the present economic climate, the landlords will see sense and realise that if they lose a tenant, it is going to be much more expensive to find a new one. Maybe they’ll even start looking at tenants as customers and not as some form of cash cows that are there to be milked until dry.”

Peter Regan, Manchester

“The Strategic Retail group of companies, incorporating FADS, Leveys and Texstyle World, occupy both high street and retail park premises. In June 2006, following the BRC initiative, we wrote to our landlords requesting their consent to pay monthly in advance as opposed to quarterly. We did a similar exercise in May 2008 to those that did not accede previously. Most of the smaller private non-institutional landlords have accepted our approach, albeit some with time-related caveats.

“The principal refusals came from the likes of British Land, Peel and Hammerson. Peel and Hammerson ignored the request (which again included the BRC letter of May 2006), preferring to take punitive action as at the June quarter day. British Land also failed to respond to the initial approach, but refused when approached again this year, the irony being that the day after refusal, we received Colliers’ Property Snapshot for June, which opened with: ‘Increasingly it is difficult to resist growing market pessimism.’ Perhaps it should inform its client.”

Howard Thompson, The Strategic Retail Group

“What a cheek. Sign a contractual agreement for five, 10 or more years (and probably get a good rent-free period of capital contribution to fitting-out costs) and agree in that contract to pay rent quarterly in advance, which suited the cash flow projections of the retailer at the time and was accepted by the landlord because it suited that landlord’s own cash flow needs. Then decide to pay it in lesser amounts, so improving the retailer’s profit and cash flow and causing the landlord to suffer additional interest costs and loss of cash flow.

“Sod the retailer’s landlords and also their suppliers, which are, at the same time, being asked to take less profit and delayed cash flow. Just reduce the price to maintain like-for-likes and cut the margin and expect someone else to pick up the bill. I wonder how the retailer’s bankers are responding to similar requests to pay interest or principal debt late without any penalty? The question probably hasn’t been asked yet.”

M J Dignan, London & Associated Properties