Non Essential Retail's first week of trading review by Commercial Property Partner at BLM Stephen Crook
As we approach the end of the first week of trading for “non-essential” retail in England how has it gone and what lies in store for the future of the retail industry?
Retail sales fell by 12.8% in the three months to May. There was some partial bounce back in May which saw growth of 12% led by online sales but they are still 13.1% down on February. The initial reports are that the first week of trading have been very positive but with reduced footfall and social distancing measures, and costs, it is estimated that FY21 will be 20% below 2019 levels.
The government has provided support by restricting the ability of landlords to recover rent whilst the stores have been closed. This was due to end at the end of this month and the government has responded to calls to extend it until the end of September. The High Streets Task Force has appointed a new Chair as a support measure? and there is a new £50m Reopening High Streets Safety Fund. However, this only addresses the immediate issues rather than the fundamental change required.
The government published a voluntary Code of Practice [19 June] “designed to provide clarity for businesses when discussing rental payments and to encourage best practice so that every part of the chain is supported”. It has been developed in close collaboration with retail sector industry bodies and although voluntary, is intended to represent best practice.
The Code sets out principles that the parties should work with transparency and collaboration, reasonably and responsibly and in good faith as economic partners, not opponents. It sets out a number of issues to consider in negotiating any new arrangements including the provision of financial information to justify the concessions. It also provides some options including monthly rent and service charge, rent free periods, deferments, waiver of interest, variations and re-gears. These options are not new but do indicate that the government expect the industry to come to its own arrangements and that government support is only a temporary measure.
Turnover Only Rents
The Code offers one option of reducing “ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed”. There are reports that a number of retailers including Fraser Group, Ryman, Pret A Manger, New Look and now All Saints have negotiated the possibility of switching to turnover only based rents. This represents a major change as although most leases provide for turnover it is linked to substantial base rents which protect the landlord’s investment value. A true turnover rent will create an incentive for the operator and owner to work together to make it a success.
How landlord’s react to these requests to avoid widespread use of the insolvency regime remains to be seem. Hopefully, the extension of the moratorium on forfeiture will give the industry some vital breathing space to try and agree the new arrangements. However, with the rent quarter fast approaching it is clear something has to change quickly to ensure survival of our high streets.
Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.