With the current uncertainties on the high street, what is a landlord to do?
Let’s first look at the uncertainties of why commercial tenants turn bad and whether they may be a mirage of incompetence in disguise.
Obviously the UK is now “out” of the EU, on paper at least, until 31st December 2020. Then what?
Commentators and pundits will speculate on the impact of the pound and corresponding exchange rates, however, right now, action and equity are a priority.
The rise in online shopping, aka the Amazon factor, is still the bane of many commercial landlords' existence, especially if dealing with voids. The reality is, we all love Amazon, especially on a cold, rainy, winter’s day where we’d rather be doing something else other than having to pay exorbitant parking charges down at the local high street or shopping centre. Parking in Cambridge is a case in point... that’s a rant for another day!
[At the click of a button, I order what I need and before you can say Jack Robinson, the doorbell rings and my order arrives. Personally, I love #Amazon.]
Landlords with empty retail spaces may not be so happy. Empty shops cost money: Insurance, security, business rates and loss of income. Painfully expensive!
Then there’s the new, “bad tenant”!
In the residential world of property investing, bad tenants are usually those who don’t pay their rent and don’t look after the property.
In the world of commercial property investing, tenants who do not fulfil their obligations are not described as “bad tenants!’ But what about when a retailer enters into a Company Voluntary Arrangement (CVA) and attempts to make an “arrangement” to cover the amount of debt they can pay.
This is when it can all go south.
You need to be living under a rock to not have heard about the recent spate of high profile tenants who are considering entering into a CVA or who have already entered into a CVA or simply gone bust.
In 2019, 29 companies entered into a CVA. In 2018 there were 38 and in 2017 there were 25. That’s a total of 92 in just three years and there were many more in and before 2016.
Who knows how many will fall by the wayside in this new decade? The question is, did they not see it coming?
Imagine you’re driving your car down the motorway, you see signs of an accident ahead of you. The traffic is slowing down, cars are piling up and you can see the speed limit sign changes from miles ahead. It’s a clear day and the sun is shining. Of course you slow down and you may even adjust your route. If you’re using Waze, (or some other traffic navigation system) it most certainly will find you a faster route. However there is not an equivalent crystal ball in the world of commercial property!
So let’s put this into context...
You’re a successful retailer, you know your customers, your profits have been streaming in for years, or even many decades for some. From a distance you can see Amazon selling books, CDs and DVDs, then they start selling clothing followed by household items, eventually providing everything you could want. The dot-com era is in full revival.
Many of us, when we want to buy something, check Amazon first. 55% of consumers begin their online shopping searches on Amazon!
Then one day you wake up and finally realise. Your business model is out of date! You’ve failed to keep up with what your customers now want and the speed at which they want it - today.
Suddenly there seems to be no recovering from the loss to your business and you’re considering a CVA!
The impact of a CVA on commercial property owners and landlords cannot be underestimated. These instruments often allow these companies and commercial tenants to change their obligations such as rent, payment terms, lease duration, dilapidation obligations and more.
Sometimes, these do not require a landlord’s consent. How is this fair?
In the recent case, Discover (Northampton) Limited and others v Debenhams Retail Limited and others  EWHC 2441, six landlords were seeking to challenge the CVA of Debenhams. Here the applicants had leases with 30 year terms with automatically escalating rents for the first ten years of the term, with rent then being reviewed on an upwards only basis at five yearly intervals. The case offers little respite since the judge rejected four of the five grounds for challenge and approved the modified CVA. Summary below...
What are commercial property owners to do now?
I guess an option would be to seek good quality advice when creating a commercial lease in the first place. Hindsight is always 20:20 vision so those of us newer to commercial property investing can only learn from these experiences.
The question for the big guns in the retail industry remains, “Where were you when Kodak disappeared, when Blockbuster vanished and when Encyclopaedia Britannica became obsolete?”
Did history not teach us anything?
Just recently, April 2019, Primark opened its 187th and largest UK store in Birmingham. Then there’s Boxpark, the new outlet on the block looking to expand in cities across the UK. Ask yourselves this, “how come Primark, Boxpark and others are expanding and succeeding where others are not?”
A number of well known digital disruptors, Uber, AirBnB and Netflix have all changed the way we live in their own way. If we are to see a revival in the high street, we need to work together to make this our new reality.
The Industrial Revolution came and impacted many back in “the olden days”. Today we are in the age of The Internet Revolution. Are these retail big guns merely dinosaurs in waiting or will they awake from their slumber?
This new era, the Internet of things, will require cooperation and collaboration from all quarters: local communities; town planners; local planning departments; central government and more importantly from businesses. That is if we are to be co-creators in this new world.
“Awake from your slumber and be different. Standout from the crowd and yes put your head above the parapet big business”.
I raise my glass in 2020 where commerce and communities work collaboratively for the greater good and we start to welcome a new era of high street revival.
Let’s play fair big business. It’s what we teach our children in the playground at nursery, so why not in real life of business and commerce?
Hanna (no h on the end!), the Hunter’s daughter.
Ps. This article seeks to explore the opportunities and risks associated with commercial property ownership. It is not intended as legal advice and commercial property owners and landlords should always seek professional advice as necessary.
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