Tuesday, 2 March 2010

Every cloud has a silver lining . . . .

Fashionista is in a reflective mood prompted by yet further dismal news about the economy. No fashionista can have failed to note that we are constantly bombarded with gloomy prophecies heralding ever new ways in which the recession will impact negatively on our lives and how the recent (but past) era of prosperity is never going to come back again. But like it or not, times of strife have also always had a profoundly modernising influence on the society.

British Retail Consortium (“BRC”), an organisation representing the retail industry, certainly embraced this philosophy. Fashonista has noted that the BRC is using the recession to increase the momentum of its campaign to persuade landlords to allow retailers pay rent for their premises monthly rather than quarterly. The campaign predates the current economic crisis and was meant to bring the market practice in granting leases up to speed with the era of information economy rather than provide relief for retailers in a difficult consumer market. But the economic downturn certainly helped to bring the message home to landlords who face a quickly raising number of defaults by their old tenants and increasing difficulty in finding new ones to replace them.

Although many landlords would rather use other incentives to lure new tenants - like extended rent free periods or options to terminate the lease before the expiry of the term - monthly payments of rent are slowly but surely finding their way into new leases. According to BRC’s survey two-thirds of all new leases granted since January 2008 have included provisions for monthly payment of rent.

This looks to be a promising change though Fashionista is not convinced that this change is here for good. Many landlords, especially in the prime locations, are large institutional investors unwilling to incur increased agency costs of managing a large portfolio of properties with monthly rent payments. Also, a lot of office premises are still let on the basis of quarterly rent. Both of these factors may remain an argument for the return to quarterly rent payments on retail premises once the market bounces back and tenants start to compete again for the best space.
It remains to be seen if the monthly rent payments are only a transient fancy in the retail market or a new, redefining trend.