Rent paid in Arrears:
Given the toughest trading conditions in living memory on Britain’s high streets – in fact the trading conditions in retail are probably unprecedented – tenants, at least those with a reasonable chance of surviving the online onslaught, are beginning to “flex their muscles.”
It’s a tenant’s market, where to some extent, lease terms permitting, they can dictate conditions to their landlords, some of whom are struggling themselves.
Intu, the leading shopping centre owners, for example, have just announced the possibility of a £1bn cash call on their shareholders. The debt-laden company, owners of shopping centres including the Trafford Centre in Manchester and Lakeside, among others, has announce it is in serious discussions with its major shareholders. These include The Peel Group, and recent investors including the Hong Kong-based Link Real Estate Investment Trust.
As retailers go into administration, CVAs, and close down, others are rationalising their estates by closing unprofitable locations. Property values and market rents meantime are falling, given the mounting vacant spaces appearing on the high street.
Whilst many stores are over-rented (paying above the current market rent), due to the long-term nature of business leases, some locations are tied-in for some time and therefore their tenants are looking for other ways to protect their cash-flows.
One way of doing this, as WHSmith is attempting, is to agree with their landlords to accept rents in arrears, as opposed to the time old industry practice of quarterly rents in advance. The successful national stationery chain is reported (Sunday Times 9th February) to be asking landlords to make the switch from advance to arrears.
There’ no law that states rents must be paid either way, it’s purely a matter of convention, and indeed residential rents are almost always paid monthly in advance. How rents are paid – monthly, quarterly, advance or arrears – is a matter for negotiation between landlords and tenant; its contractual not a statutory requirement. In normal circumstances when there is competition for rentals between tenants, as is currently the case with residential, it’s a way for the tenant to quickly secure a tenancy.
But not so in retail; it’s not normal circumstances. So unless the property is in a highly desirable location, commercial landlords may be coerced into agreeing more tenant friendly terms: lower rents, monthly payments instead of quarterly, short leases, or as in WHSmiths case, payments in arrears. These demands will undoubtedly put landlords themselves under more financial pressure.
According to the Sunday Times, WHSmith already pays rent in arrears on several large high street stores, and secured rent cuts averaging 35% on leases renewed last year. Given the continuing tough trading conditions and the shrinkage of many retailers estates, competitors are likely to follow suit with cash saving demands on landlords.