High street landlords who are losing out on rents due to increased retailer insolvencies, are being urged by Jonathan Fewster, senior associate at Bircham Dyson Bell LLP to work with tenants to provide flexibility within leases in order to save the British high street.
"Retailers are at the sharp end of the recession; they are feeling it first and seeing most of the fall out with even the larger high street players like Habitat and Jane Norman falling into the hands of the receivers," explains Jonathan Fewster.
"Landlords are facing pressure from tenants to agree different payment terms - perhaps paying monthly rather than quarterly up front to help with cash flow. Although they may be entitled to require rent to be paid quarterly up front, it may be wiser to provide flexibility in order to keep their tenant long term.
"Gone are the days of signing a ten year lease on a property and counting on an upwards income stream for the whole term as a one way bet - retailers simply can't give that kind of guarantee that they will still be trading in twelve months time, never mind ten years. Unpopular though it will be amongst landlords and their funders pressure is increasing to concede the sacred cow that is the upwards only rent review and accept reviews in either direction that will reflect true market value. A retailer who is locked into an upwards only rent review will find itself at a distinct disadvantage to a newcomer who can take a lease at the then market value rather than pay a higher value set in a previous buoyant market.
"Of course with modern leases, on a tenant's default there's always the ability to look to a previous tenant under an authorised guarantee agreement, but in the wake of recent case law a landlord may not be able to enforce terms against that previous tenant's guarantor. In this environment of weakening tenant covenant strength we can expect landlords to exercise greater scrutiny in considering any application for an assignment of a retail lease. This in turn will increase pressure on retailers seeking to react and restructure in a difficult market.
"My advice to landlords is be flexible in order to to retain tenants in what is proving a hard time for the high street. Units standing empty will ultimately drive down the overall rental rates on the high street creating a downward spiral."
Both Landlords and the funders standing behind them need to be more realistic about the strength of tenant covenants and true value of income streams derived from retail property.
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