Mon 11 May 2020

Is it time for a new strategy?

As businesses emerge from lockdown into whatever normality looks like, we may start to see an increasing use of company voluntary arrangements ("CVAs") to try to improve balance sheet deficits amongst landlords.

Having been at the sharp end of CVAs for some years now, landlords have lived – and just about coped with – the threatened demise of the High Street. But such is the acceleration of that collapse over the last few weeks, that one wonders whether landlords themselves will survive the drastic drop in rental income from the voids caused by failed retailers.

This is particularly so with respect to shopping centres, who have the "double whammy" of voids created by the collapse of so many retailers in their centres and the prospect that shopping centres may be one of the last places to be released from lockdown, perhaps for many months, until a vaccine is available for Covid-19.

There needs to be a complete re-think of the current landlord tenancy model, of the full repairing and insuring lease with upward only rent reviews. Admittedly the duration of such leases has come down since the financial crash of 2008, but contradiction between the short termism of retail with the longer term returns that property investors/funders have become used needs to be addressed. There is also the significant overprovision of physical space given to retailing, be it on the High Street or within the local or regional shopping centres up and down the country.

Landlords, tenants, funders and investors should take the opportunity (yes - opportunity!) that the current crisis in High Street retailing affords to review the physical location of each of their real estate assets and assess whether they are fit for purpose. Those that are not should be re-purposed and, where they remain fit for purpose, the landlord should re-assess their tenancy model to make it more pertinent to the marketplace in which they, and their tenants, operate. Perhaps more focus on turnover-driven rents, flexible space and terms should be considered. In return, tenants can expect greater scrutiny, not of their audited accounts, but of their cash flow projections, their business plans and, most importantly, their strategies for the future of their business.

So as we prepare to leave the Orwellian past of lockdown, we can perhaps look forward to a Brave New World of retailing where landlords and tenants operate as one and where once thriving businesses are properly restructured to meet the demands of the markets within which all stakeholders operate. If not, we can expect more of the same with more retailers falling over, more CVA's shedding landlords/reducing rents. What do you do when landlords, eventually and inevitably, run dry?

John Gallacher is a consultant in the Commercial Real Estate division at law firm Morton Fraser

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