Tuesday, 1 December 2009

Onwards and upwards.

Upward only rent reviews have been banned in Ireland by its Government.
“The practice of including upward only review clauses in business leases is a deeply entrenched one. The time has come to end this practice. I look forward to more equitable business arrangements being put in place in the future which take account of the reality facing many business owners and retailers.” said the Minister for Justice, Equality and Law Reform, Dermot Ahern.

It was promised but was thought to be a sort of manifesto pledge, a bit like Lisbon or no new taxes. The Irish government feared a lack of investment if they couldn't guarantee rent returns. Retailers cheered and developers booed.

Flannel's , a small but high profile chain, have knocked 20% off their rents with a CVA. Continuous above inflation rent rises are unsustainable. Now will the government consider it here or are retailers going to have to continue on with Company Voluntary Arrangements to force landlords into more realistic positions?

18 comments:

AntiCitizenOne said...

Go the whole Hog and instigate (improvement discounted) LVT.

Blue Eyes said...

Are upwards only contracts a kind of market failure due to lack of competition in the property industry? It seems highly unusual to me that the landlords have so much power over the tenants even now.

Why do tenants sign up for these shocking deals?

It is noticeable how much less shop space there is in British cities compared to, say, continental or American ones. Perhaps our retail industry is hamstrung by poor planning policy?

Houdini said...

Sorry but you are wrong.

Friend of mine is a major, but MAJOR, North West property developer and they now need to have 4 points above base to borrow and their loans still need paying, and are having to be renegotiated.

I don't appreciate how retailers think they are exempt from market forces like everyone else, though I do know and appreciate that empty office space is a waste of money, but that is a different issue.

I think it would be better to defer increases or build up a debt of increases.

Property developers don't have a huge pot they just dip into to build their property; they have to borrow and trade to get that money, JUST LIKE RETAILERS. So who is going to give a kind ear and make legislation to limit the costs for developers, or are we only going to cry on retailers behalf?

Blue Eyes said it, Why do tenants sign up for these shocking deals? These are supposed to be savvy business operators.

Eagles Meadow in Wrexham cost £750million to build and develop, and took near ten years, all that has to be paid back and a profit turned, but businesses have the developers by the goolies, knowing they have the upper hand. The developers are almost bankrupt and are selling the whole thing for £480million because the bank loans are just too much to service. Do you think they should have a special rate and deal set by the Government? The HQ development in Chester only kept from bankruptcy because Cheshire council bought a block of offices at £23million, and the developers are not going to break even as rents are too low to service the rest of the debt, so should they have special legislation?

It seems only one side of the story is being told, and why should we legislate for stupid and greedy retailers who though they were being clever by selling and then renting? Or renting with a stupid contract they couldn't afford? Or renting in the wrong place?

Anonymous said...

I don't understand your post, Houdini. With compounding, the impact over a period of years that above inflation rent rises have on business owners is often terminal. It impacts retailers large and small.

By your own admission - tying retailers into such clauses exempts them from true market forces - which have been very much downward for a long time.

Developers make a business decision when they let out a property, much like a business owner makes a business decision when renting - just needs to be a level playing field.

Anonymous said...

EG this week, page 34.

'The average length of a commercial lease fell to 5.9 years in 2009 according to the BPF Annual Lease Review. The review found that 40% of leases of 6 to 10years had a break clause. Rent free periods are at record levels.'

The taxpayer is now a major investor in property through the failed Scottish banks. Fiddling about with lease terms would lead to more losses.

Long leases are a thing of the past.

James Higham said...

Well, about bloody time.

ScotsToryB said...

Houdini has annoyed me.

'Friend of mine is a major, but MAJOR, North West property developer and they now need to have 4 points above base to borrow and their loans still need paying, and are having to be renegotiated.'

Fair chance he's a multi-millionare(on his uppers, of course).Only 4 above base? Do try to start a new business via bank lending and be prepared for a shock.(why am I thinking of Catch 22 here? He is a MAJOR major developer...).
Trying renegotiating an upward only lease, Mr.H. and be prepared to be laughed out the door.

'Property developers don't have a huge pot they just dip into to build their property; they have to borrow and trade to get that money, JUST LIKE RETAILERS. So who is going to give a kind ear and make legislation to limit the costs for developers, or are we only going to cry on retailers behalf?'

Oh, the nasty retailers try to get a better deal than that on offer and thus squeeze the developers margins.

Business, huh? Whodathot?

''Blue Eyes said it, Why do tenants sign up for these shocking deals? These are supposed to be savvy business operators.'

You are not given a choice. Anytime I have dealt with these people it is on a take it or leave it basis.

'Eagles Meadow in Wrexham cost £750million to build and develop, and took near ten years, all that has to be paid back and a profit turned, but businesses have the
developers by the goolies, knowing they have the upper hand.'

That is so naive in it's naivety that it's naiveness is risible and suggests to me you have never had to deal with a shopping centre lessor. The only time I have seen a developer held by the goolies was when one of the major 'anchor' shops told them how it was going to be: the smaller retailers do not have that clout and are therefore used by the developers much as Socialists use the middle class, i.e. they think they can continue raising rents(taxes) ad infinitum and the world will continue to go to work on invisible pink coloured unicorns run by sustainable rainbow power.

'The developers are almost bankrupt and are selling the whole thing for £480million because the bank loans are just too much to service.'

Or: 'Eagles Meadow was developed in partnership with Wrexham County Borough Council.'

Do I need to say more on that? Perhaps you should go look at Wat Tylers' blog 'Burning Our Money' and search under 'Simple Shopper'.

'Do you think they should have a special rate and deal set by the Government? The HQ development in Chester only kept from bankruptcy because Cheshire council bought a block of offices at £23million, and the developers are not going to break even as rents are too low to service the rest of the debt, so should they have special legislation?'

Well not so much special legislation but perhaps a level playing field - yer man appears to have been kept from bankruptcy by a council buying something that
another council developed? Did I read that wrong? No. Do explain how that works again.
Alternatively, I am the small business owner exploiting the Man(and Council who, over ten years can sustain and build a £750million development) by suggesting his rent offer may be a teeny-weeny bit harsh?
By suggesting that contrary to the idiotic leftic thinking that, as I am a small business owner I am .

ScotsToryB said...

therefore rich and can sustain that level of financial attack indefinitely.

'It seems only one side of the story is being told, and why should we legislate for stupid and greedy retailers who thought they were being clever by selling and then renting? Or renting with a stupid contract they couldn't afford? Or renting in the wrong place?'

Some of us never had the option of selling(having never owned) and therefore if we want to be in the right place have to rent(think of it as 'Location. Location. Location. & if you need that xplained...). Could not afford? See above.
Wrong place? Prepare to lose your business, that's how it works.

Oh, as an aside.

You may wonder why I am so annoyed by your simplistic notions. Here's what makes the difference between having a good going business and one that goes down the tubes: the managenent of a shopping centre leasing on a short term basis a previously empty shop in a prime location which otherwise would have been empty through the
Christmas period and letting them sell, guess what? products that directly competed with mine and from which I usually made enough to support my business through 'til Easter.

But not that year. The business, my business, closed at the end of December that year, £10000 down in take on one product line.
My heart feckin bleeds for the Property Developers whose social conscience comes to the fore every time they think they can claim to cont/

be losing money.

Tell me, Mr. Houdini, do you and your pal go down the local boozer and stand outside smoking and reminiscing about the bad old days over t'pint or are you smugly
wrapped up in velcroed skiing gear on the gas heated patio of said developer?

STB

Houdini said...

tying retailers into such clauses exempts them from true market forces

Of course and that aspect is something we agree on, but, why do these people sign a contract? When you buy in a shop sale do you consider the effect on that retail business of your cheap purchase or do you just think...sucker!?

My main gripe is the generalisation that landlords and developers are to blame for all the rental ills of retailers, and I think that is very much not the case. In many cases retailers thought they were on to a winner by renting, as in Woolies, and thought the retail and credit boom would last forever, but were wrong.

Houdini said...

I know I did a long and rambling reply, but where is it? Ho hum, it was nice for a long while.

Bill Quango MP said...

Ok. Angry debate.
For me the point that Houdini makes about retailers selling their units and then renting them back is valid.
Its just PFI for the board room.
I was staggered when Boots did it. I seem to recall that their rental bill went from 50 million to 470 million. The accountants idea being that the tax bill is reduced by paying the higher rents, while reducing debt and interest payments from the sale of the stores. A real gamble but for some it pays off.
I did mention the developers problems H, check the link for a sample page.Some investors have gone ape already in Ireland.

On the other hand, having worked for a few big chains, the lease arrangements can be ridiculous. Rent reviews never include empty units. Never take account of changing circumstances. A council carpark may close for a year or a new one way or no parking zone takes shoppers to the other end of town. Charity shops on zero rents and exempt rates aren't included in reviews. A new development, like Cabot's circus in Bristol, comes along right next to the existing high street. Those high street rents won't go down. A chain cn't just pull out of one lease it has to go bankrupt. So instead it uses profits from elsewhere to pay for the loss. That is only sustainable in a boom.
The deck is stacked very very heavily against the trader. As stated only the anchor stores have any power at all.

A 5 year upwards only may see a doubling of rents. A unit with a 100k + 50k rates rent and a 150k staff bill cannot pay a 200k + 100k rates without firing everyone that works there.
I can recall many of examples of rip of rents and many of impossible to let units coming discounted, fitted and serviced.
Upwards only means exactly that. Removing it doesn't mean downwards only, maybe just the same.Or more realistic increases not fixed to an investors loan.

Some landlords have a fixed % of turnover as rent. Reduces in the good times and falls in the bad. Still a good deal for the landlord, turnover isn't profit.

BE: Sometimes the deal is a linked deal. If you want to get into White city you have to take Tunbridge Wells too. Often there just isn't a deal. 5 years with a break clause isn't too bad a deal if there are 10+ stores but it can be murder for a very small chain.
One failure takes the profit from two success. And who can tell if a shopping centre or high street will work?
Everyone knew Bluewater would be a success but if you had another unit in Lakeside too it took a big knock. As did Bromley.

At present the tennant takes the risk. The landlord signs the 5 year guaranteed rent , rushes to the bank and borrows that whole 5 year future rents to fund the next development.

When the occupier calls it right and makes a fortune on a low rent {does happen} the landlord will eventually be able to up the rent to fair and finally to unsustainable. That has happened repeatedly over the last 20 years.

There should be a fairer way.
Just my 2 cents.

Blue Eyes said...

Thanks BQ. It sounds like a classic case of collective dominance.

Houdini said...

Have I lost two large posts here or have they been deleted by admins? I asked because they were definitely there but are gone.

Anonymous said...

Bill Q.

The points you make about the rent review process are not correct. All relevant evidence is taken into account.

Business rates and Councils making car parking as expensive and difficult as possible must take some of the blame for the problems in retail.

The days of the long lease are over. Landlords are now happy to accept turnover rents.

Bill Quango MP said...

Houdini. You're not being moderated here. Open forum, all welcome as you know.

Anon: You may be correct but have had to go and get the evidence and off to arbitration due to empty units and dead rent deals not being included.
One of the horrors was the super mark up shops. A Starbucks making 600% markup could afford to pay over the odds for a prime location that it needed. That caused unrealistic rent inflation. Worse, unlike say, a Primark opening next door, a coffee shop drives tiny footfall.

The days of the long lease are over. Until the 90's boom the average lease was 25 years take it or leave it. Glad that's gone.

Anonymous said...

Glad you take my points Bill.

A Starbucks will be a relatively small unit. A Primark would be much larger. Comparables at review would take all these points into account. The Starbucks Zone A would not be applied to all other units without discounts for size, lease length and numerous other factors.

You are also forgetting the history of leases. They started at 99 with no review. Then 99 with one review. Then reviews at 21 year intervals, then 14 then 7 and now 5. Revews are simply a reaction to the inflation that started after the war. This is all academic now as, in the main, long leases defunct.

Anonymous said...

nice post. thanks.

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