Retailers launch fresh protest against quarterly rent payments
New Look head of property leads 25 occupiers against landlords. Sarah Stewart reports
Last week, 25 of the Property Managers Association’s national retailer members signed an open letter to landlords, urging them to adopt monthly rents.
To the retailers, the letter represents their biggest unified effort to persuade landlords that quarterly rent payments in advance are unrealistic. To their landlords, however, the prospect of receiving an open letter is more of an irritation than an incentive to help their occupiers.
The initiative has been spearheaded by Richard White, New Look Group’s head of property and finance manager of the association.
He has carried out a survey of all 55 retailer members, among them Blockbuster, Dollar Entertainment, Tie Rack, Store 21 and Pets at Home, on whether quarterly rents are an issue.
Twenty-six responded, 25 of which agreed that it was an issue of immediate concern and said they planned to approach their landlords to make the change.
“It seems weird to pay three months in advance for any product or service,” says White. “People do not pay three months in advance for the rent on their homes. It seems even stranger that this is still the case during the current economic climate, when retailers need help more than ever.”
Of New Look’s 600 stores, the rent on 100 is paid for on a monthly basis. White says he aims to pay monthly for the entire portfolio.
The question of monthly rents has long been mooted. Even before the recession, there were calls to end the antiquated system of quarterly rent collection, which was based on landlords travelling to collect rent on horseback four times a year. These calls have grown ever louder over the past few years, as retailers such as Woolworths struggled — and ultimately failed — during the financial crisis to meet their quarterly rent payment dates.
However, more successful retailers are aware that their struggling neighbours are given rent concessions and want the same benefits.
John Duxbury, director of asset management and leasing at Prupim, says: “Some companies do have genuine problems that would be eased with monthly rent, some are bandwagon jumpers, and some quarterly paying retailers are just aggrieved that their competitor is seen to have an advantage and demand the same benefits.
“There are two types of open letter. The first comes from a retailer who is in genuine need.
The second tends to be a rant-and-rave letter.
We have had instances where we have seen retailers sign an open letter demanding monthly rent, and then turn us down when we offer them.”
Prupim offers three monthly payment “packages” to its tenants.
PRUPIM’S rent packages
- The hardship policy: The hardship policy provides any discretionary help to occupiers in all sectors that are facing financial difficulty. Analysis of the company’s financial performance is undertaken by Prupim for a rental solution tailored to the tenant’s specific needs.
- The small retail business policy: Prupim’s small retail business policy was introduced in March 2009. It allows independent companies that operate from a small number of low-rent units to switch to monthly rent payments on a permanent basis, providing that legal documentation is in place, costs are covered by each party and payments are transacted electronically.
- The formal monthly rent policy: Prupim’s formal monthly rent policy is offered to most of its tenants. Retailers are allowed to pay monthly on a discretionary basis, subject to the companies’ financial position. The restructuring applies only to rent. Any other charges, such as rates, have to be paid quarterly. However, Prupim took the decision to apply no administration fees in 2012, following a review it carried out in March 2011.
Gurdial Flora, property manager for US company NBTY, which owns health food chains Holland & Barrett and Julian Graves, says: “The question
of monthly rents is something we are now considering as the issue has been brought back to the table.
“It would make sense to take steps towards monthly rent, given the tougher trading conditions retailers have been exposed to.”
Flora says only a handful of Holland & Barrett and Julian Graves stores pay rent on a monthly basis. Most still pay quarterly.
“Each one of our banks trades differently, so we could look at it on a case-by-case basis. This is the strategy that most landlords are employing. The only downside for us would be the administration costs and the changes in the payment system.”
BACS to the future
White does not agree with claims that a switch to monthly rent payments would create extra red tape: “We live in an electronic age. There is no ‘paperwork’ to speak of and electronic payment transfers are easy as clicking ‘send’. The only significant change to be enacted is the change
to the landlord’s payment process between the landlord and its bank.”
However, for debt-laden landlords, it is not that simple.
Dion Panambalana, partner at law firm Hogan Lovells, explains: “The buck doesn’t stop between tenant and landlord, but reverberates to landlord and bank. How easy it is to convince a bank to switch payment structure rests solely on the relationship that a landlord has with its bank. Some might share a good relationship and be open to it, some might not.”
There are some solutions. If an existing lease is in place, it is regarded as a contract that would be compromised. However, it is possible to circumvent this problem with a side letter to accompany the lease that allows for temporary variation. This is a personal concession to the tenant to pay monthly rent over a temporary period of time and is expressed as a waiver.
“Usually, these letters will make provision for a concession in the short term, but the period of time could be three months, or it could be 12,” says Panambalana. “I have seen side letters implemented for the duration of an existing lease, well beyond that time.”
All 25 retailers bar Dollar Entertainment that signed the open letter are Land Securities tenants. Managing director of retail Richard Akers says this is “concerning”.
However, he adds that the REIT is happy to change from quarterly payments to monthly payments on the condition that it is compensated for not receiving quarterly payments in advance, in addition to the bank charges demanded by 12 payments a year rather than four.
LandSecs will only offer this consession if it is felt that it would not be financially disadvantaged as a result and would carry out extra due diligence to ensure that granting monthly rents would not be to the detriment of its business.
Akers says: “Our policy is to be as flexible as we can be with retailers. We established the first monthly rents for JD Sports, when they requested it.”
Akers questions why retailers are not willing to be more generous to their landlords.
“Landlords will never be receptive to the idea of giving something away for nothing but, if a retailer said it was willing to pay a fee for monthly rents, the landlord would listen.”
The British Retail Consortium has been campaigning for monthly rents for years.
A spokeswoman said: “Landlords like to have as much money as they can up front. Our argument is that it’s bad for town centres and bad for landlords to insist on quarterly payments, because if you insist on a lump sum up front with the economy in the doldrums, then you’ll push the situation to the point where no one is paying rent at all.”
Ian Fletcher, director of property at the British Property Federation, adds that the landlords that seem reluctant to make the change to monthly rent are not being obstructive for the sake of it.
“Landlords are willing to negotiate where there is genuine financial need. What landlords aren’t receptive to is round robin letters that can sound threatening in tone. When a landlord is able to help, more often that not, it will.”