When struggling retailer MFI put part of its business into administration last month it will have come as little surprise to many. One piece of news that will have raised a few eyebrows is the revelation that MFI was in talks to secure a rent holiday for the stores it wants to keep.
In these extraordinary times landlords are taking the view that while having a retailer teetering on the brink of collapse in their schemes is far from ideal, it is better than the alternative of empty units.
However, rent holidays are not an ideal alternative, either for the landlord – which loses cash – or for the retailer – which is advertising that it is on the brink of collapse. Furthermore, many question how effective a solution it really is.
So, as we face a potential economic bloodbath in the first quarter of next year, should landlords be giving rent holidays and is it fair on those retailers still paying up?
“Small and failing retailers are putting a gun to landlords’ heads,” says JP Morgan executive director of general retail Simon Irwin. “But there’s no point in giving a break to someone you are not confident will be around in six months.”
Whether you are a retailer or a landlord, rent holidays are a way out of a sticky situation. For landlords, providing this lifeline to a tenant is a better alternative than potentially losing out on rent entirely.
For a retailer it is most often requested when administration is the next step and, crucially, gives them a much needed boost of working capital. With next year looking even more severe and administrations a certainty, saving three months’ worth of rent could be the difference between retail life and death.
“February and March are going to be an absolute horror show,” explains Irwin. “Getting a rent holiday is the same as getting three months of working capital.”
Clearly though, it’s far more complicated for the retailer than simply signing on the dotted line to agree a rent-free period. Landlords will expect to see something in return from their tenant to ensure that they get the best deal they can. Among the guarantees they might demand is that once the period is over, the retailer makes future payments by standing order. Landlords will only want to give life support to a struggling retailer if it is likely to emerge healthier than before.
In the case of retailers that are subsidiaries of much larger and stronger parent companies, the landlord might only agree to allow the holiday if that parent company will agree to act as a guarantor. The stronger the guarantor, the stronger the covenant and the more valuable the backing becomes.
A rock and a hard place
You could, of course, argue that if a retailer is unable to pay its rent today, the situation could be worse in three months’ time. However, in today’s market landlords want to avoid empty units at all costs. Firstly, the scheme’s reputation and viability takes a serious knock when voids start appearing. Since April it has been even more costly to leave a property vacant because empty property rate relief no longer applies.
Nevertheless, it is not a tactic worth employing if a retailer’s foundations are rotting. Hartnell Taylor Cook partner Andrew Bradley says: “In some respects it might just be delaying the inevitable in certain cases. If the trading concept is doomed anyway then it probably is just postponing its downfall.”
And helping the weakest retailers isn’t always the most popular of moves. There are many who argue that it is not just unhelpful but also unjust.
Travis Perkins property director Martin Meech says: “Landlords are distorting the marketplace by giving different rents to retailers. They’re taking a very short-term view and they’re actually seriously affecting their long-term customers.”
He adds: “Supporting people who are going to disappear doesn’t help build long-term relationships. People like us are going to be around a long time and it’s people like us the landlords should be supporting. We might well close one or two stores on retail parks where the support is not there. Where we’ve got marginal stores we’ll just close.”
But for a retailer that has the fundamentals right, even though it has fallen on hard times, it might be a perfect solution for both sides. Bradley says: “Sometimes a retailer’s trading concept is viable but it has gone into administration because the company has been sold to a private equity company that has piled the debt on to it. That’s a good example of where an administrator reduces the debt hanging over a retailer and it gets back on its feet. In this case a rent holiday might breathe new life into a retailer and bring it back to health.”
While it might seem unjust to support retailers that have fallen on hard times, neither landlords nor retailers in residence on a scheme will welcome the sight of voids. “Other retailers on a park will ultimately benefit from a rent holiday being offered because if it is not offered then they will end up with vacant units around them. If you get a shopping centre with a lot of vacant units it gets into a nasty spiral,” adds Bradley.
Asking for a rent holiday is only something that a retailer should think about when it is really on the ropes. Expecting a landlord to bend over backwards to keep a retailer in a scheme just because it is struggling is a risky strategy. It will only pay off if there is enough cause for the landlord to consider it a reasonable solution with long-term benefits.
Lorenz Consultancy senior partner Anthony Lorenz says: “You don’t open negotiations by putting a gun on the table and putting a bullet in it. A landlord will not give a tenant a rent holiday if he’s going to go bust anyway. The landlord wants to be proven that if he doesn’t give the rent holiday there’s a chasm he’s looking down and will fall down because the retailer is going to go bust.”
Times are just as tough for landlords as they are for retailers. The fact that a few have already started to consider rent holidays as an option is telling, especially when you think how undesirable it is. But with landlords over a barrel as well, many simply have no choice.
As Eversheds head of real estate litigation Paul Moorcroft explains: “It can be difficult to bring swift and successful legal action against tenants in administration and the commercial pressures on landlords to agree a payment holiday, or to receive a lower sum of money, can be overwhelming.”
He adds: “If retailers face a serious threat of going into administration, landlords may be more amenable to them taking a short rent holiday. Often landlords conclude that agreeing to a payment holiday is the only sensible way forward and there is certainly a trend of landlords working to assist tenants that are in trouble.”
Both landlords and retailers have got used to the good times and retailers’ store portfolios have grown unchecked. But the truth that is emerging from the chaos is as simple as it is harsh: there is too much retail space. One view is that the plus side of recession, however painful it will be, is that the weak will fall by the wayside and a fitter sector will emerge.
Irwin says: “Strong retailers are simply not going to want to be on a park where there are significant voids. There will be a slow migration out of the weaker parks and on to the strong ones. Some of these parks are going to die very slowly. There’s too much space out there and this has been building up for five years.”
Giving away space for free is sometimes to shut the stable door after the horse has bolted. Only when the weaker retailers have left will equilibrium be restored. This process has already begun and will pick up in pace over the next six months.
The next quarterly rent payment at the end of December will be tough and March will be brutal. Bradley says: “It’s going to sort the men out from the boys.” Landlords will undoubtedly be faced with requests to give more and more concessions to struggling retailers. But by granting rent holidays to the weak, they may be giving unfair advantage to bad tenants and making life even harder for the good ones.
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