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Tough times for retail landlords

As bricks-and-mortar retailers continue to struggle, landlords have to brace themselves for more tough negotiations ahead.

Even as spring shows signs of finally emerging, there are no green shoots of encouragement for landlords of retail premises. Poor profits reported by big name retailers indicate that rental negotiations will be difficult, with retailers pushing for substantial cost cuts. Lord Wolfson, chief executive of Next, is unlikely to be alone in warning landlords that the company’s decision to remain in particular premises will depend on the landlord wanting 'a reasonable rent'.

Alongside Next, retailers announcing poor profits and disappointing trading include Moss Bros, Kingfisher and Mothercare. Furthermore, Toys R Us and Maplin both failed to find a buyer and ended up in administration, putting thousands of jobs at risk.

The vast majority of fashion chain New Look’s creditors have voted for a company voluntary arrangement (CVA) involving the closure of up to 60 stores and rent reductions on many more. Other retailers could also go down the CVA path, with Carpetright considering the option as well as reducing the size of its property portfolio.

In effect, landlords are being held to ransom. If they don’t agree to reduce rents, retailers are likely to move elsewhere or simply drop that outlet. If landlords don’t support CVAs, troubled retailers could end up in more drastic insolvency procedures, delivering even worse returns for the landlords concerned. It’s in all our interests that landlords and retailers find a mutually workable solution, not least because of the substantial reliance of pension funds in property investments.

So, what can be done?

Better sales in-store could perhaps be achieved through an enhanced shopping experience. By bringing in augmented and virtual reality to replicate online shopping features in the physical, offline world, stores could become more than just locations to sell and buy. Some of these changes depend on retailers acting alone, but some could be enhanced by closer working between retailers and landlords to develop the optimal shopping environment.

Meanwhile, landlords need to keep a close eye on their portfolios, making sure rental contracts are robust and taking a commercial approach to negotiations. If client retailers do end up in a CVA scenario, the proposals will need careful consideration to protect landlords’ interests as much as possible.  

There is a lot of case law that addresses the rights of landlords when a tenant
enters into a CVA. It is essential that landlords and their professional advisers scrutinise the CVA proposals carefully with reference to their commercial position before engaging in the decision-making process – potentially making modifications in order to protect themselves in the event that the arrangement fails.

For further information, please contact us.