Better deals for all tenants or just the luxury sector?

Landlords are starting to realise that if they want to achieve lettings and fill their high street or high end retail premises, they have to be more flexible on rents. While some of the big retailers are either closing stores or not in a position to expand, the smaller value retailers are being made offers and getting approached to take space they would not normally be considered for. Fashionista's view is that there are some bargains to be had.

In this credit crunch era landlords are becoming troubled tenants' largest creditors and can wield significant influence in particular at creditor meetings. As reported in Drapers, at the recent creditors meeting to save Stylo (the owner of Barretts and Priceless) the vote to accept the company voluntary arrangement is said to have been defeated by the group's landlords who voted against reduced turnover rents.

So, where does this leave the more up-market fashion retailers? Are they in a better position to negotiate favourable terms on new leases, especially where the available premises are considered 'high end'? Up market retailers may secure lower rents per square foot more easily than their more down-market contemporaries because of their strong brand values and clarity as to their target customer. They stand out in shaky economic times. Wouldn't a landlord of a higher end property want a better looking, more resilient, on-trend fashion tenant?

It appears so - the market is awash with the news that many luxury brands are seeking and securing prime retail space in London – Fred Perry has recently taken an assignment of a lease of space in James Street WC2 which has 6 years to run while Jack Wills, the self styled university outfitter, is taking over Diesel's Kings Road premises and a lease with 11-years to run. The bargaining position of landlords is not to be totally written off, as recent situations have attested. Jack Wills, for example, is paying a premium for its recently acquired Kings Road premises.

Economic Hope?

In the current economic climate, landlords and shopkeepers are adapting to harsh realities. House of Fraser has recently negotiated with landlords throughout the UK to pay rent on a monthly basis. It is believed that it has successfully done so on 15 of its 63 stores including Lakeside and Medowhall shopping centre. There have been calls from the likes of Philip Green to push landlords to agree to monthly rental payments to assist the cashflow of high street traders.

Regardless of the economic position, a precedent may be set for the future for retailers to pay on this basis even in a growing market. The length of commercial leases has been considerably shortened over the last decade, there are fewer 25 year leases, with shorter leases of 5 to 10 years now being favoured.

In this period of low activity, with landlords desperate to fill space, tenants are gaining the benefit of further incentives, such as longer rent free periods from 6 months to between 8 and 12 months. Further, as there appears to be a relocation of head offices into the wider West End area with Marks & Spencer moving to Baker Street and Burberry to Victoria, the prediction is that there will be a re-adjustment of rental expectations by landlords.There was promise in the fashion market earlier this year with 15 new Burberry stores opening and 33 Laura Ashley stores planned. There will be opportunities for those with expansion plans to grow in this market, with stores such as Whittard with 127 vacant units and the Officers Club's 160 stores and various other retailers in decline; JJB Sports, Jessops, Zavvi, Adams and Land of Leather and more recently Marks & Spencer, which has announced that two main chain stores are to close and Viyella, with 107 shops and concessions including a flagship store on Regent Street. Experian, the financial consultancy, has predicted that at least one shop in ten would lie empty in 2009.

The Winter of Discontent – the battle over monthly rents

10For those retail landlords who are feeling the winds of change as tenants dig in for the months ahead and bargain hard for letting concessions, talk of monthly – or even weekly – rents is not breaking news. Unsettling as the Hermes "revolution" may be, the principle of breaking with the tradition of quarterly advance payments to assist tenant cash flow is nothing new.

The latest debate - echoing calls for the same in the early nineties - relating to monthly rental payments has raged for the best part of a year. Whilst there are arguments for reforming the practice, landlords are faced with not only the threat of voids and devaluation of assets but also the reality of meeting quarterly/contemporaneous repayments to their lenders.

Common examples of other rental concessions being negotiated by tenants are additional break opportunities, extended rent free periods, turnover only deals and demands for landlord capital contributions. All bring with them their own problems as landlords look forward to reviews and ERVs (estimated retail values).

Buckling under the pressure from Sir Philip Green and Lord Harris, some major landlords have just announced that they will allow retailers with less than four stores to pay rents monthly, with no financial penaltyIt now seems certain that a return to the recession of the early nineties is on the cards and that for retail landlords there is still more to come as we head towards Christmas and reports of household name retailers facing administration become daily rather than monthly news.

Many landlords are taking advantage of this period of low activity in the investment market to review their portfolios and the projected ability of their covenants to perform. With Christmas approaching landlords must be just as pragmatic as tenants and start putting in place strategic plans to combat what could quite possibly be, "the coldest winter since records began….".