At the last quarterly rent day in March, landlords received a fraction of the rent they were due as stores were forced to close under lockdown. What will happen as rent day approaches this week?

  • Property expert says government backs retailers over landlords and “they have carte blanche not to pay rent”
  • Updated: Knight Frank predicts just 10% to 20% of tenants will pay rent this quarter
  • Agent warns “retailers are deferring rent to 2021 and no one knows how they’ll repay it”
  • Poundland changed the way it pays landlords and has paid rent throughout the pandemic

Beleaguered retail property group Intu collected just 29% of due rent on March’s rent day, Hammerson received 37% and British Land was paid 43% of due rent between March 2 and April 30.

Today, Intu said it expects to collect rents and service charges of just £310m this year, compared to £491.6m last year.

Monsoon liverpool street

Monsoon Accessorise had told landlords it will shut stores if it is not offered rent waivers

Individual landlords have also been affected, with one consortium of independent property owners joining forces last month to form the Landlords Union. The group has hit back at the government prohibiting landlords from issuing statutory demands and winding-up orders on tenants struggling to pay bills because of Covid-19.

Alongside this legislation, the government imposed a ban on evictions for non-payment of rents, which on Friday it revealed it was extending until September.

This means that the looming quarterly rent payment day of June 24 is an approaching storm for retail landlords and tenants alike.

On one hand, retailers have taken limited revenue for the last three months and some do not have the cash flow to pay their rent. On the other, there are landlords that risk breaching banking covenants if they suffer a second consecutive quarter of subdued rental payments.

Property consultant Knight Frank predicts that just 10% to 20% of retailers would pay rent this quarter.

Mark Allan, chief executive of Landsec, which collected 63% of its rent in March and early April compared to 94% last year, says: “June rent collection rates are likely to be worse than March given that most of the negative economic impact from Covid-19 has fallen in the second quarter.” 

Property adviser Jonathan De Mello says: “Last quarter, even though lots of retailers negotiated rent holidays, many paid something. This time, given the lack of cash flow for the entire quarter and the fact they are empowered by government guidance, the situation is likely to be more extreme.

“There are no real winners here but it’s definitely retailers that hold the stronger hand in negotiations because the government backs them and they have carte blanche not to pay rent.”

Some retailers are playing hardball. Boots, Matalan and Primark were just some of the retailers that were understood to have withheld rents last quarter, while Monsoon Accessorize has written a letter to landlords warning that it will shut down stores if it is not offered rent waivers.

Negotiating deals

The current climate has given landlords a greater impetus to negotiate with tenants, with some landlords willing to give hard-pressed retailers concessions.

For example, outlet centre operator McArthurGlen has waived all rent and marketing charges for tenants closed from April 1 to June 30. It will waive all minimum base rent once centres are able to reopen and from July 1 to the end of the year will either charge turnover rent or a “much-reduced” minimum base rent.

Other landlords have offered tenants rent deferrals, allowing them to pay backdated rent either when stores have reopened or at the end of their lease.

“Where retailers will come unstuck in the next quarter is if they do not engage with landlords. Putting your head in the sand and not communicating with your landlords is not going to serve you well in this environment”

Benjamin Wall, Poundland

The boss of one clothing retailer worries that even rent deferrals are a ticking timebomb for ‘non-essential’ retailers. He says in other countries where stores have reopened sales have been between 40% and 70% below pre-pandemic levels, so the cash will not be available to backpay rent.

“It’s one thing to not pay your rent when shops are forced to close; if shops are open but the sales aren’t there and landlords are demanding double rents and other costs in arrears, it will cause massive problems across the whole industry.”

One property agent concurs: “Retailers are deferring rent to 2021 and no one knows how they’ll repay it because the spend in that missed quarter won’t return. The spend in the next one will probably be 50% of what it would normally. So how will everyone afford to repay?”

markrobinson

Mark Robinson says retail has ‘moved from a landlord versus tenant problem’

Ellandi chief executive co-founder Mark Robinson also flags unpaid service charges as a major issue for retail landlords.

“The commercial pressure of unpaid rent is one issue, but not being able to pay the cleaners and security staff who are perhaps more needed than ever right now is really problematic for the whole industry,” he says.

The government has introduced a temporary code of conduct which is intended to provide a ‘voluntary framework’ for retailers and landlords in ongoing rent negotiations, but initiatives which have been lobbied for by industry bodies including a possible rental space furlough scheme have gained little traction to date.

“I think it is fair to say, as has been evidenced by the collaboration between Revo and the BRC that we have moved from a landlord versus tenant problem and now have a situation that is acknowledged by all concerned, even in the corridors of government, as a structural market failure that we are witnessing,” says Robinson.

It is this growing storm that prompted Poundland, which has paid rent throughout the pandemic, to change the way it pays landlords.

The value retailer shifted to monthly payments in arrears and monthly service payments in advance across its UK stores as the coronavirus pandemic began to spread.

Poundland head of portfolio management Benjamin Wall says this change was accepted, albeit not embraced, by its landlords because of clear and proactive communication and believes other retailers could learn valuable lessons from its approach.

“We have been very clear with all of our landlords, to the point where any landlord that rang our team I have spoken to directly to explain exactly why we made the decision and when they will be getting their money,” he says.

“Where retailers will come unstuck in the next quarter is if they do not engage with landlords. Putting your head in the sand and not communicating with your landlords is not going to serve you well in this environment. What does is open honesty and doing what you say you’ll do, and trying to be as fair as possible.

Dan Sweeney, commercial property partner at law firm TLT, advises retailers to share their current predicament with landlords.

“You need to make clear how the crisis is impacting your business and what the cash burn is,” he says, pointing out that some landlords may be under the impression that retailers are receiving substantial government handouts. “It’s important to make plain where the pain is being felt and that government intervention only goes so far.”

Retailers could also share details on their future trading projections and the investments they need to make post-lockdown to help landlords understand their predicament, says Sweeney.

He also recommends retailers offer landlords something in return for rent concessions. “You’re much more likely to get a deal if a landlord is getting something in return,” he adds.

“If your proposal is a rent holiday or deferment, what can you offer the landlord in return to give them greater certainty? We’re seeing breaks being moved or removed and leases being extended to help secure a deal.”

Sweeney says there is an opportunity to “reset the landlord retailer relationship”.

“Communicating at a time where both parties are facing unprecedented stress will build different relationships. Our retail clients are in constant dialogue with landlords right now and are coming up with solutions. It deepens the landlord and tenant relationship and moves towards partnerships. It will enable retailers to ask for different terms specific for their business and the landlord will understand why,” he says.

Boots and Primark’s approach

Boots has come under scrutiny for deferring rental payments on some stores despite the vast majority of its estate remaining open through the pandemic.

A spokeswoman for the retailer says despite many stores remaining open over the past two months, trading has been “severely impacted”.

Boots Glasgow

She says: “Boots is a unique business and whilst we work tirelessly to support the NHS and help people access pharmacy and essential healthcare, footfall into our stores has significantly reduced and trading has been severely impacted. We are staying open to provide a pharmacy service for our patients who need us, but in many of our stores, over the past eight weeks, we have just not had any customers.”

Boots wrote to its larger commercial landlords to discuss its options in light of this.

The spokeswoman adds: ”We have reached revised agreements with many landlords and while some discussions are still ongoing, we have paused some payments.

“We wish to work together with our landlords to reach a fair agreement that supports Boots as one of the UK’s essential businesses at this time so we can all address this unprecedented crisis together.”

Primark parent ABF’s finance director John Bason agrees collaboration between retailers and landlords is of paramount importance. The fashion retailer withheld £33m worth of rent on its closed UK stores at its last quarter.

“The problem we had with the quarter day in March was that all the stores closed on the Sunday and the quarter day was Wednesday. We were saying we need to talk to you landlords because if we’re going to be partners there’s a lot of pain here, what can you do to help?” he says.

Primark at Fort Kinnaird

Although Bason says it is “too early” to determine whether Primark, which has made zero sales in the UK this quarter, will pay rent later this month, he believes the coronavirus pandemic has accentuated the “inflexibility” of the retail property market.

“We have on the high street, even before Covid-19, an evolving landscape. You think: how can you have long-term leases that you can’t get out of and upward only reviews? I think [the current situation] will bring not a crisis but a realisation it needs to change,” he says.

Poundland’s Wall concurs: “There has to be a change. There needs to be an understanding that rental values, the value of our high streets, are not what they were. They have contracted and been under-invested in and are not what they were five to 10 years ago. Whether this crisis accelerates that I’m not quite sure yet but it will take a very long time for the impact on value to flow through to our landlords.”

A property crash?

Withholding rent will leave some struggling landlords in a very precarious position.

Wall says: “They are in a really awkward position and have no real recourse. They have got to keep their centres open and the world turns with money. If you cut the tap off, I don’t know how you continue to manage your estate with no income coming in.”

Some landlords are already close to the brink. The most high-profile of which is Intu, which said last month it would ask lenders for a debt standstill while it recovers from the impact of the pandemic – a process it says could take until the end of next year. For businesses like this, the future will lie in the hands of the banks.

Poundland Stoke fascia

Poundland negotiated a new rent relationship with its landlords

De Mello anticipates that some independent landlords will be pushed over the edge with another quarter of non-payment.

“Some landlords will go under because at the moment they’ve not had any protection from the government. They simply do not rank high enough on the pecking order,” he says.

“Even a major landlord like Intu has a few thousand employees compared to the tens of thousands at a grocer, which makes a big difference politically in what the government is willing to do. Some landlords are close to breaching banking convents and many are very indebted, so if they don’t have rental income coming in and valuations are hit it is very hard for them to pay bank loans or interest on bank loans.

“Banks are responding favourably to a degree on extension of those covenants, but I can see some smaller landlords going under.”

A source at one property firm says although the retail property sector is set for a “tricky 12 to 18 months”, the underlying resilience of the market will make a property crash unlikely.

“A lot of investment funds will still have capex so will be looking into the market and in the UK, and certainly London, there will be institutional or overseas demand to come in which will remain after the pandemic subsides,” he says.

“Some landlords will go under because at the moment they’ve not had any protection from the government. They simply do not rank high enough on the pecking order”

Jonathan De Mello

Longer-term, De Mello believes this crisis will usher in long-overdue changes to the retail rental sector, from introducing shorter leases with more flexibility and turnover-based rents, to landlords agreeing to pay for certain costs associated with new store openings such as fit-outs and marketing contribution on longer-term leases.

However, one property agent argued that for turnover-based rents to be fair on landlords, they must be inclusive of all sales not just items bought in the shop itself. He argued that taking online sales within the catchment area of a store into account would be fairer but this would require a greater level of transparency from retailers.

Another property agent believes turnover-based rent needs to offer landlords the same flexibility as retailers if it is gain widespread appeal – be it allowing landlords to boot out retailers after a predetermined period of sales underperformance or guaranteeing they will receive turnover-based rent even when the value exceeds the market rental rate.

June 24 will be marked in landlord and retail calendars as a day of reckoning – but the greater battle will be in the months that follow as the pandemic triggers a wider rethink of the UK retail rental model.