The quarterly rents debate may still be raging, but there are other ways retailers can work with their landlords to make savings in these straitened times. Ben Cooper investigates.

Dealing with landlords is often regarded as a black and white issue, but sometimes – and particularly in markets like this – retailers can reduce their property costs. Landlords are feeling the heat as much as, if not more than, retailers and are facing their worst nightmare in the form of an increasing number of voids and falling portfolio values. So with property being such a big cost for retailers, there is no better time to examine these outgoings with a fine-tooth comb.

First half results from some of the UK’s biggest landlords, including Hammerson, Liberty International and Land Securities, were a sobering reminder of the pressures that developers are under, with each reporting losses running into the hundreds of millions compared with the same period last year.

It is clear that although retailers are finding it hard too, for those that want to open stores or tighten existing deals it is the right time to strike. Less clear is exactly where they can realistically expect their existing landlords to bend and many might be surprised to discover some of the areas where they can improve their leases in order to claw back costs.

One area where retailers might be unaware of how much they can save if they play their cards right is when it comes to service charge disputes. It’s an area that many will think they can do little about. More often than not shoved to the back of a lease and dealt with at the eleventh hour, retailers often treat service charges as a bit of an afterthought, but in doing so they risk talking themselves out of thousands – perhaps even hundreds of thousands – of pounds.

It’s easy to spend other people’s money. However, spending it wisely and justifying the cost is another thing altogether and therein lies the rub when it comes to service charges. There isn’t a retailer in the country that would deny that running a shopping centre is a costly business and, as with all buildings, things go wrong and repairs are a necessary evil. Nor would any deny that it is fair for the tenants within that centre to have to contribute to the costs involved. The issue is that, in the past, some landlords have not always explained these charges in the most transparent manner and retailers feel they have been stung.

However, this is only avoidable if service charges are taken seriously from the word go and not left until the roof falls off a centre and a bill into the millions arrives on the landlord’s doorstep. Retailers need to pay the same amount of attention to the service charge clause in the lease as they would a more prominent section, such as the rental period, according to David Howell, managing director of Profile Consultancy, which fights retailers’ corners in service charge negotiations. He believes firmly in the adage that prevention is better than cure.

Open book policy

Retailers need to insist that a landlord gives them their assurance that they will adopt an open book policy with regard to the service charge before they sign a lease, so that if they do decide to replace the roof, fit new lighting or install escalators, it will be done openly and without any nasty surprises.

Howell says: “All too few tenants really go into these things with their eyes open and they leave themselves exposed. There needs to be a greater openness and dialogue before a lease is signed. A wise tenant will ask the landlord before they sign what works they expect to be doing in the next few years.”

And, while there are many retailers that press landlords hard at the pre-signing stage, the system still hinges on landlords being honest, because they are under no obligation to divulge any planned repairs even if they know about them. What retailers want is more flexibility and co-operation from their landlords, so that unnecessary disputes are nipped in the bud rather than getting out of hand at the cost of everyone involved.

If retailers take a shrewd stance at this stage, the rewards can be plentiful. By pressing a landlord to lay its cards on the table, retailers can contest any extra bills for repairs that were not mentioned from the offset. Another worthwhile tactic when a retailer first takes space at a centre can be to achieve an exclusion on paying extra service charge for a set period, on the grounds that any repairs needed in that time are due to wear and tear on a building and were incurred before it was trading. When those repairs might be a new roof that could easily cost£10 million, the savings are worth fighting for.

Rent reviews are another key opportunity. Nil uplifts are something that everyone wants but few feel they are likely to achieve. However, B&Q property director Terry Hartwell says it is something all retailers should be pushing their landlords for. And, surprisingly, there are those among the landlord community who agree. It may be difficult and unjustified to try to demonstrate that there is no demand on a site that is clearly a beehive of lettings activity, but in the case of many other locations where activity has ground to a halt, retailers should be trying to do just that.

There is often an undercurrent of mistrust between retailers and landlords. However, when all’s said and done, nobody wants a costly and time-consuming fight when it isn’t absolutely necessary. For both sides, the trick is to pick your battles when it comes to rent disputes. A more judicious approach can produce the best result for both parties and save a lot of time and money.

In a world where upward-only rent reviews are still the norm, keeping rents where they are is a victory that, in times as hard as these, is worth every penny. Nil uplifts might seem too good to be true, but they are possible to achieve if retailers pick their fights well.

B&Q has been one of the most successful retailers in this area in the past few years, achieving 17 nil uplifts in the past 18 months. True, it is easier for retailers to secure deals like these in the out-of-town market because it has borne the brunt of falling consumer spending, leaving landlords in perhaps the weakest position of all, but it is also down to B&Q’s shrewd negotiations.

However, while things are hardly looking rosy for the out-of-town market, a shake-up brought about by new arrivals, such as the expected arrival of electricals retailers Best Buy and Fnac, will create new opportunities for landlords and start the pendulum swinging back. The days of retailers having the upper hand won’t last forever, so they should exploit the present situation as much as possible.

On the flipside, town centres are more complex and it is often very hard to prove there is such little demand in a centre or high street, because of the busy lettings scene. However, there are still opportunities to be had. Every town has its own distinct retail eco-system so, with a selective approach, it’s possible to prove that there are weaker areas that justify a request for nil uplifts in rents. “For most retailers, it’s about being judicious and aggressive,” says Atisreal head of retail leasing Ian Parish. “In-town, it’s very much on a town-by-town basis.”

And retailers don’t have to wait for the landlord to give the word for a review to happen. If one is due, a tenant is well within its rights to put the pressure on because a landlord could be dragging its heels.

Landlords have also been criticised for falling back on third-party arbitration, a practice that many say benefits nobody and costs both parties too much. “In this market, a lot of landlords’ reactions are to go to a third party,” says Parish. “If there’s a clear-cut case for a nil uplift – and often there are clear-cut cases – they should just deal with it in the normal way; what’s the point of getting into a fight? There are more progressive landlords that are trying to build better relationships with their customers. They won’t get into a fight when they don’t need to.”

The retailer/landlord relationship may be slightly frosty at present, but there are simple steps that can be taken by the latter to give their tenants a much-needed lift. Putting the vexed question of monthly rentals to one side, landlords should concede that there are cogent arguments to be made in favour of more flexibility on rent reviews and service charges.

As Hartwell points out, doggedly going to arbitrators costs time, money and effort and often achieves very little for either side. And with regard to service charges, there are many examples of the relationship working perfectly harmoniously, but still too little transparency on the part of landlords.

Retailers need to take every opportunity that comes their way at the moment. When it comes to property, the key is careful analysis of where you can save money and then shrewd negotiations with your landlord.

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