Fashion retail’s rent debt reckoning

“We’ve never been afraid to pay big rents,” says Gant’s managing director of northern Europe, Fergus Patterson. “We pay a significant rent on Regent Street, for example. But you pay big rents for big footfalls and big sales. If you’re not getting those, it’s an issue.

“Covid-19 was not the landlords’ fault and equally not my fault as a retailer.”

Patterson’s comments are at the crux of retail’s spiralling rent debt crisis. In an unprecedented scenario where many retailers’ shops have been shut, in some cases for up to half of the 12 months, and no party is at fault, who should pay and how?

Property management company Remit Consulting estimates that unpaid retail rent since March 2020 reached £2.2bn after December rent quarter payments were totted up, making up just over half of all outstanding commercial rent debts for the period. Just 50.5% of retail rents owed on 25 December had been collected seven days later, creating rental arrears for that quarter of £630.8m.

The question is not when, but if retailers can afford to [pay their rent arrears]

Tom Houghton, H&M’s head of expansion for the UK and Ireland

But figures for the big institutional landlords appear even worse. Shopping centre owner British Land collected just 46% of its rent for the December quarter. When this story was published (1 February), it had only collected 72% of September quarter’s rent, 73% of June’s rent and 49% of March 2020’s rent. Meanwhile, Landsec’s central London estate, excluding offices, collected just 29% of rents for the December quarter and only 36% was collected from regional retail tenants. For Hammerson, just 41% of UK retail rent debt was collected.

This debt pile is only set to increase as “non-essential” stores remain shut across the country under national lockdowns in the UK and Ireland.

Muddied waters

The level of arrears has been able to amass after the government’s introduction in March last year of a moratorium on evictions for unpaid rent, which is currently scheduled to run until the end of March this year. This gave struggling retailers a “stay of execution” to protect cashflow, while taking away landlords’ key leverage to enforce rent collection and protect their own revenues.

Now, with revenues largely stalled again for many bricks-and-mortar retailers and landlords as non-essential shops remain shut, the question remains as to how these cash-strapped businesses can tackle the mounting arrears.

 

The British Property Federation (BPF), British Retail Consortium (BRC) and Revo jointly lobbied the government in April 2020 to intervene, suggesting a Furloughed Space Grant Scheme whereby retailers, landlords and the state could share the fixed property costs on a sliding scale. But the government showed no appetite for this solution.

Taking things into their own hands, many retailers and landlords have come together to try to agree mutually acceptable deals to split the bill. But this is not true for all parties, as businesses on both sides of the debate still refuse to engage in discussions nearly a year on from the start of the first lockdown.

Dominic Curran, the BRC’s property policy director, believes that so far retailers have come to an agreement with around 80% of their landlords – a figure widely accepted by retailers and landlords approached by Drapers.

Many landlords have been incredibly pragmatic, honest and flexible to reflect the lower sales from stores

David Butler, CEO Crew Clothing

The nature of these deals, however, varies markedly and many are now likely to need revisiting in light of this latest lockdown.

For many the answer has been to share the pain, as retailers pay half rent during lockdowns. But some have gone further in agreeing total rent holidays for a defined period. Others have opted either to defer the rent bill to a later date when retailers’ sales will have recovered, or to extend the end date of leases to cover the months retailers cannot currently afford to pay.

Another option has been the removal of break clauses from leases, to guarantee the retailers’ occupation for longer, while some landlords have dipped into retailers’ deposits to cover unpaid rents.

Bespoke solutions

However, deals depend on numerous factors.

Curran explains: “One retailer asked for a 50% reduction for lockdown and had every landlord agree, then another at the value end did the same and landlords said no. So it’s really varied, and depends on the relationships, the locations, the type of retailer that the landlord wants to have in their portfolio, the financial situation of the landlord and how much headroom they feel they can give.”

Crew Clothing CEO David Butler agrees that it depends on retailer/landlord relationships and circumstances: “Many landlords have been incredibly pragmatic, honest and flexible to reflect the lower sales from stores or cash pressures from retailers. However, a significant minority have refused to engage or be flexible.

“The bottom line is that for many retailers there is a bubble building of debt which in some cases will not be possible to service and will develop into failure.”

He warns Covid-19 has blown the traditional lease model of longer terms and upward-only rent reviews out of the water, and highlighted a growing need now for “partnering relationships between both parties”: “In some locations the asset is no longer worth what it was for either the landlord or tenant, and that is essentially where the sector is at today – many on both sides do not want to accept that reality.”

As a landlord I wouldn’t want to feel I was giving a retailer a rent concession and yet they were back trading normally

Fergus Patterson, managing director of northern Europe, Gant

For Gant, the approach has been to try to share the pain of lockdown. Patterson says most landlords have been understanding – some offering rent-free periods in return for short lease extensions, while others, where they have turnover rents, have waived the minimum rent guarantees so no rent is payable under lockdowns.

“The trust has to be on both sides,” he insists. “As a landlord I wouldn’t want to feel I was giving a retailer a rent concession and yet they were back trading normally. It’s incumbent on the retailer where necessary to share the information to prove footfall is down, to demonstrate that revenue is down. We can point to online, as we’re doing well there, so we know that it’s a footfall issue and not a product issue.”

Mark Williams, executive director of regional retail landlord Rivington Hark, agrees: “You’ve got to have a level of honesty and transparency if that partnership is going to work. Then you work with them on a case-by-case basis – you tailor the outcome based on the transparency of the discussion.”

But another regional shopping centre developer and owner reports “some really poor behaviour from some retailers who can and should be paying up [but have not been]”: “I think getting paid half rent when you’re in lockdown is probably as good as a landlord can hope for. That shows genuine sharing of pain.”

Enforcement action

As the moratorium deadline looms next month, landlords will soon be able to start legally enforcing repayment of outstanding debts, where agreements have not already been reached.

The landlord continues: “The debts that have built up are unsustainable and not everyone will act reasonably. When people start acting unreasonably you see an infection. It’s like game theory.

“Without further clarification, guidance or mandated resolution by government, it’s going to be an absolute bloody mess.”

And the retailers share these fears and calls for more clarity from government. Tom Houghton, H&M’s head of expansion for the UK and Ireland, warns: “The question is not when, but if retailers can afford to [pay their rent arrears]. The moratorium extension has provided a stay of execution, but I envisage more pressure will be applied by landlords after this period ends, unless agreements are reached prior. If the economic challenges remain consistent and the burden of outstanding arrears is not shared, this could be the breaking point for many retailers.

You can quickly get to a situation where a £25,000 rent arrears is actually equalled by the legal costs

Dominic Curran, property policy director, British Retail Consortium

“We have engaged in many positive conversations with our landlord partners, however, there are instances where we have been unable to reach an agreement.

“It is imperative more clarity is provided [by government] on how to treat outstanding rent arrears focused on affordability and fairness. Tenants being responsible for 100% rent during a period of enforced lockdown is inequitable.”

“We appreciate many of our landlord partners have their own obligations with lenders and banks which means their hands are tied unless in turn they are provided relief. A holistic and equitable approach for all stakeholders will be important, based on the understanding a tenant’s ability to pay is intrinsically linked to the trading conditions.”

 

Patterson agrees: “I would like to see the government take a more proactive stance with landlords and tenants, to force them together. Putting off the rent through the moratorium means technically we still owe that money.

“Cash-wise it’s beneficial to us, but it just extends the indebtedness of everyone. I would like to see the government come out with something that says it should be shared responsibly.”

Unwelcome interest

Another key concern for retailers with debt arrears is that most leases contain provisions for interest to be paid on late payments, adding further to their bill.

Some have also been subjected to county court judgment (CCJ) letters threatening to take legal action on unpaid rent. Action can only be taken once the moratorium is lifted, and the letters are largely being used to force retailers to the negotiating table, but they do indicate an appetite from landlords to start recouping losses.

The BRC’s Curran explains that retailers experienced an increase in CCJ actions after the moratorium was initially extended until the end of December 2020, as landlords realised they would have to wait longer before being able to enforce debts. An added issue for retailers is that when a CCJ is initiated, the retailer also becomes liable for the landlord’s legal costs. “You can quickly get to a situation where a £25,000 rent arrears is actually equalled by the legal costs.”

One landlord explained: “If a retailer is completely refusing to engage with you, I think it’s perfectly within your rights to issue a letter before action. As what are you supposed to do?”

What will come out of it will be much stronger economic partnerships

Melanie Leech, CEO, British Property Federation

With nervous tensions now building ahead of the moratorium deadline, and many retailers and landlords back at the negotiating table trying to agree deals to cover this latest lockdown, there is a clear sense that how both parties have behaved towards one another over the course of the pandemic will define future relationships across the industry.

Jojo Maman Bébé founder and CEO Laura Tenison “gratefully” accepted offers of rent-free periods or the waiving of some rent during lockdowns, made by half her landlords, but eschewed any moves to defer rent or rejig other leases, instead opting to pay those landlords in full, as the overall rent bill was reduced, and “I take my lease obligations very seriously”.

But she cautions: “Having a good memory and having an ethical approach to business absolutely works both ways. Those landlords that have supported us will be the first ones we go to [when we are looking for new sites].”

“People will remember how you behaved,” agrees BPF CEO Melanie Leech.

“What will come out of it will be much stronger economic partnerships between those that have behaved well towards each other, either from the start or belatedly. But there’s also a souring of relationships between a minority on both sides that are perceived to have behaved badly. That will stick either way.”

What is certain is that retailers and landlords have a huge hurdle ahead of them, and one that could lead to collapses on both sides if they do not find ways to support one another and work together. The next few months will be critical in navigating this crisis, but even once this current debt pile is resolved, the question remains about how to structure leases going forwards to face the new retail reality left in the wake of the pandemic.

“If there’s one good thing that can come out of the challenges [for retail property owners and occupiers], it is that it has brought people together in a dialogue of a kind that hasn’t happened before and was probably well overdue,” explains Mark Robinson, co-founder of shopping centre owner Ellandi and chair of the High Street Taskforce. “Hopefully we can use this crisis to cut a new sustainable path for the way we do business going forwards.”