Date 11 March 2009
The clock is ticking ever closer towards the next quarter day on which commercial rents fall due, this being 25 March. The big question is - will tenants be able to pay their next quarterly rent payment in full and on time, or will there be yet more defaults and more empty shops on the high street?
In February there were an estimated 90,000 empty shops, according to Experian. This is a rise of nearly 30,000 since December. This figure is expected to rise to 108,000 by the end of March, when the quarterly rent payments are due, and 139,500 by the end of the year meaning that a record 15.5% of the UK’s retail will lie vacant.
This year should prove to be one of the most difficult on the high street for years. Given the global economic downturn customers are likely to be more cautious than ever with their spending and the fallout in the retail sector could be severe. Even if retail sales recover, this will not come to the aid of those retailers who have grown rapidly in the last decade off the back of cheap credit, as they struggle to secure finance that has either dried up or become prohibitively expensive to obtain.
However, there are signs that despite the difficult trading conditions tenants could soon get some restbite – the campaign to persuade commercial landlords to amend existing leases to allow monthly rent payments may finally be getting results.
Retailers have long complained that quarterly rent payments are an unwanted burden on cashflow, particularly in a difficult trading environment. The practice of paying rent quarterly dates back to the Middle Ages. At a time when the horse was the best form of transport available, collecting rent more often than four times a year was impractical. The lords of the land sent out their agents every three months and, to help tenants remember the days, they were associated with quarter days in the Church calendar.
In Britain, the quarter days were the four dates in each year on which servants were hired, and rents and rates were due. They fell on four religious festivals roughly three months apart. Hence, the dates were set at Lady Day (March 25), Midsummer Day (June 24), Michaelmas (September 29) and Christmas (December 25). Nowadays, in the days of electronic banking the quarterly rent system is seen by some tenants as archaic. The British Retail Consortium (BRC) has criticized the practice of quarterly rent payments as a throwback to the middle ages, “rooted in the days when communications were governed by the speed of a horse.” In the 21st Century there really is no excuse for simply carrying on doing something because that’s the way it has always been done.
The BRC calculate that quarterly rents cost the retail sector £145m per year in lost interest and extra borrowing costs, and it argues that requiring rents three months in advance is at odds with standard business practice. It also makes little commercial sense to make demands of your tenants that see them become insolvent. As a spokesman for the British Property Federation (BPF) puts it: “A bankrupt tenant is of no use to a landlord in an industry built around long term relationships. Our members want to help their customers.”
Two of the strongest opponents of the current system are Sir Phillip Green, owner of Arcadia and Lord Harris, Chairman and Chief Executive of Carpetrite, who both attended a meeting on 10 September 2008 with the aim of reaching an accord between the BPF and the BRC. The meeting was seen as positive, with particular progress made on retailers in trouble, who it was agreed should now get the right to monthly rent if requested. However, the “ultimate goal” of the BRC, the recognition of the principle of monthly over quarterly rent, was still some way off.
Recent developments have been positive for tenants. On 24 October 2008 the Daily Mail reported that landlords had “caved in to demands to pay monthly rent”. It goes on to comment that “this is likely to trigger a wholesale change across the industry which will see all landlords switching to a fairer monthly deal.
One of the largest landlords in the UK, the pension fund manager Hermes, has already broken ranks with the property industry by agreeing to end the historic requirement to pay rent quarterly in advance for all its 2,000 tenants across its retail, office and warehouse properties. And it looks like Hermes will not be alone. David Fischel, Chief executive of Liberty International, Britain’s biggest shopping centre owner whose portfolio includes Lakeside in Essex and the MetroCentre in Gateshead, has said that Liberty would take a pragmatic approach to retailers who are having difficulty in paying rent. “It’s a question of working with your retailers” he said. “Where you believe those difficulties are temporary, you do what you can to make sure they maintain occupancy.”
A spokesman for Land Securities, another of Britain’s biggest commercial landlords has also said that “there are constructive, ongoing discussions” with tenants, with a view to moving towards monthly rent.
However, it seems that if tenants want to take advantage of this shift they will have to make the first move and approach the landlord. When doing so it is best to be upfront with the landlord. Let the landlord know if you are struggling, and explain that having conducted a review of your business’s cashflow you believe that the area that would have the greatest positive effect is converting from quarterly to monthly rent payments.
There is no legal or practical argument for landlords seeking to use monthly rent payments as a trade off for other benefits, such as higher rent. The tenant has a strong negotiating position given that an insolvent tenant will not be able to make any payments – and the landlord will not want to be faced with empty premises in the current financial climate. In fact, even businesses who are not struggling should be able to persuade the landlord to agree to monthly payments – why should the “good” tenants be punished when the weaker tenants are rewarded with more flexible terms.
Our experience at SA Law is one of having witnessed a noticeable increase in requests from tenants for monthly rents. If you turn the clock back 6 months it was virtually unheard of for a tenant to make such a request, but it is now something that we consider on almost every transaction, from both sides of the fence. We have successfully negotiated monthly rent for tenants from previously stubborn landlords, and have advised landlords on the pros and cons of accepting monthly rent – and found that on the whole they have been receptive to such requests from tenants.
The tenant and his solicitor do need to be careful to avoid the pitfalls of such a negotiation. For example, the landlord’s administration costs will inevitably rise due if tenants pay their rent quarterly. Tenants should therefore keep an eye on their service charge to ensure that their landlord has not tried to sneak in additional admin charges. A service charge cap should limit this problem and provide greater financial certainty to the tenant.
In the long term, as more new tenants are attracted to leases with monthly rent payment landlords will have no choice but to sit up and take notice. With three of the largest landlords already committed to switching to monthly rent payments it is surely just a matter of time before the rest of the market follows suit.
If you require any further information or assistance with any of the issues featured in this article, please contact Terence Ritchie on 01727 798000 or by email at terence.ritchie@salaw.com.
© SA LAW 2009
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