Radical plans in new report
Reshaping lease and rent model aims to save shops
House of Fraser is negotiating a CVA but it won’t save its store in Edinburgh
Shorter leases and rents based on turnover are among a radical set of proposals aimed at easing the cost burdens on retailers and helping landlords fill empty units.
Property consultancy Colliers International has drawn up a five-point plan to introduce more flexibility into the retail market.
The 1954 Landlord & Tenant Act, which presents a barrier to the introduction of five-year leases, does not apply in Scotland and many landlords are already looking at tenant turnover to judge whether rents are appropriate.
The proposals are a response to the havoc that has been wrought on the sector by major increases in business rates and other costs, such as the minimum wage and higher taxes, highlighted in Scottish government figures.
Retailers are also facing further competition from internet sales which have contributed to the growing number of companies either closing or shedding stores through Company Voluntary Arrangements (CVAs) which allow insolvent companies to pay creditors over a fixed period while continuing to trade.
The plans are revealed ahead of a decision by creditors on whether to accept House of Fraser’s CVA proposal.
Colliers’ proposals call for a five-point plan to better balance the interests of retailers, landlords and investors:
– Standard five-year leases
– Rents based purely on the turnover achieved by the retailer in a particular shop
– Mutual options to break the lease dependent on agreed turnover thresholds
– A ‘white box’ approach to shop specification where a basic fitted unit is made available to the retailer to minimise their fit-out
– Limited incentives/rent free
Colliers’ retail agency director, Dan Simms, commented: “We understand the inordinate pressures that retailers are currently facing as long-term structural changes to the retail market play out. But retailers, landlords and investors face equal challenges, and the way forward has to be an equitable approach which respects the situations of both.
“The property industry now needs to think about a radical reshaping of the lease model for much of our retail property.”
Commenting on the five point plan, he added: “These types of lease features are relatively common in the retail factory outlet environment but have not been brought in a structured way into the mainstream market. They create genuine alignment between landlord and occupier, and offer both the opportunity to flex rents and occupation of space.
“This isn’t just blue sky thinking. This model won’t be relevant to some circumstances, particularly in fragmented ownership High Streets and for flagship stores but there are an increasing number of similar leases being agreed across the UK and we are close to launching a leasing campaign for a new mall redevelopment within a well-established shopping centre where all leases will be offered on this basis.”
John Duffy, retail director in Scotland, said: “There are no issues in Scotland in terms of the 1954 Act, which doesn’t apply, and landlords here already know that they need to be more flexible in terms of their approach. Many are already looking carefully at turnovers to assess if current rents are feasible.
“Of course, it will generally be easier for shopping centres to consider this new approach in the first place: with a single landlord, they can afford to offer a revenue-linked rental deal to a tenant that they want to attract, because it fills a gap or need.
“However, some landlords in struggling High Streets may also look at this as a way of filling properties and ridding themselves of the rates obligations that they now face.”
The proposals come ahead of the consultancy’s annual Midsummer Retail Report, which is launched this week and also calls for reform of the CVA process.
House of Fraser verdict
House of Fraser will learn the outcome of its CVA proposal tomorrow as its creditors vote on whether to accept the deal, which would result in the closure of more than half of its stores.
The retailer had faced tough negotiations and push back from landlords on its proposals and, unlike other major retail CVAs (for instance New Look and Select) that have passed through with strong majority backing, the House of Fraser deal is far from a foregone conclusion.
One creditor, Harry de Ferry Foster, director of the Charities Property Fund, said: “Everyone loves to kick landlords because they think they’re greedy fat cats,” he said. “Butit’s our charities and pension funds that own these stores.”
House of Fraser plans to reduce its stores portfolio from 59 to 28 by early next year.