09/12/2013

Commercial Property e-Brief – Whose market is it anyway? Renegotiating lease terms in 2014

The term “tenant’s market” is something we hear a lot these days but with the market still being relatively flat, have landlords started to get used to the idea of tenants being in charge?  Many retailers will have been following, with interest, the developments earlier in the year around the Republic stores and Mike Ashley’s struggle to secure support from certain landlords over revised lease terms.  This has prompted some wider discussions in the office about landlords’ and tenants’ interests in renegotiating lease terms and what this means for both parties in 2014.

CONFLICT BETWEEN LANDLORDS AND TENANTS

In today’s market, tenants are demanding much more from their leases.  Landlords need to be offering the right sort of property in the right location, while tenants are looking for shorter terms, rent reviews which move up or down, and much greater transparency.  Retailers are arguing that they are the ones having to put their necks on the line in this market and archaic lease terms will only ever lead to problems for them in the long term.

Landlords also indirectly share these concerns, as the last thing property developers and investors want is for their tenants to experience financial difficulties and leave an empty unit.  In light of this, retailers do, then, struggle to understand the reluctance of some landlords to accept terms such as monthly rent payments, when this would only improve the tenant’s cash flow, which can only be a positive thing.

We have seen a number of retailers over the past year approaching their landlords mid-term to seek fairer obligations in their leases.  The chief executive of Dreams even took the nifty approach of sending a letter to its landlord in an attempt to secure more favourable terms and enclosed a deed of variation documenting the proposals already signed!

IS IT ALL BAD NEWS FOR LANDLORDS?

Landlords have struggled to come to terms with increasing requests for more favourable terms from their tenants and it is easy to think tenants might be using their muscle to rewrite business terms in the quest for greater profits.

Landlords should try to look past their tenants’ requests and think about the advantages for their portfolios: shorter leases with break clauses and more flexibility for a tenant also gives a landlord more opportunities to freshen up their tenant mix at a site – for instance, by reallocating a larger unit to a stronger performer.  On the flip side, tenants may be reluctant to spend money on quality shop-fits if they know they are only going to be at the property for a short period of time.

Of course, location (particularly in retail) remains key, and now, more than ever, landlords with properties in prime locations are always going to be in a much stronger position and will most likely be calling the shots.

WHAT SHOULD TENANTS LOOK FOR IN A MODERN LEASE?

A tenant’s main objective when renegotiating lease terms is to reduce their outgoings and minimise any exposure.  Tenants would be well advised to secure the input of their surveyors and solicitors at an early stage to ensure all parties are considering what is likely to be accepted in a 2014 lease.  Tenants should be thinking about:

  • caps on service charges to give some predictability on expenditure in any one year;
  • uninsured risks provisions to get around the unfairness of paying rent on an unusable property;
  • allowing group company sharing of occupation to reduce costs in having to apply for formal consent to assign or underlet the property;
  • monthly rent to improve cash flow; and
  • abolishing upwards only rent reviews.

The Republic case is an interesting one as here, a tenant sought to secure more favourable terms across its entire portfolio by way of collective bargaining – the idea being that if more than 75% of the retailer’s landlords did not agree to the revised rent proposals by a stipulated time, it would close some of its stores.  The resultant impact on jobs posed an interesting conundrum for landlords and with one statistic suggesting that around half of high street and shopping centre leases are due to expire by 2015, both landlords and tenants will need to look carefully at what they require from a lease in these interesting times.

 

To discuss this e-Brief in more detail please contact a member of our commercial property team.