148.Landlords are perhaps the least visible stakeholders in high streets and town centres but are nevertheless extremely important. As discussed in chapter one, disparate property ownership, and lack of landlord engagement, are key barriers to high street and town centre transformation and high rents are affecting retailers’ profitability. In this chapter, we consider the relationship between landlords and tenants, before turning to consider the formal, contractual basis of that relationship, leases.
149.At the outset, it is helpful to bear in mind that there are huge variations between landlords, which range from pension funds down to individual owners, more common in high streets and small towns. They can be based in the UK or overseas with the property managed by a UK-based asset manager. Naturally, we heard that landlord-tenant relationships varied just as widely. Matthew Griffiths, a retail chartered surveyor said:
The affordability of the retail operation in a High Street shop is of no relevance and no interest to a property owner until a lease comes to an end and a retailer walks away, or unless a retailer enters into Administration or a CVA (Creditors Voluntary Arrangement).
However, Ed Cooke, Chief Executive of Revo, which supports businesses in the retail property and placemaking sector, said that landlords were “very interested” in their tenants’ trading performance and were “motivated to try to support [them] in their operations”. Similarly, Roddy Bushell of Fitzwilliam Malton Estate, which has a large holding in Malton in North Yorkshire, said:
In smaller towns, the tenants have a lot less resilience if things are not going well. A landlord now has to be interested in helping, because if he is not, he will end up without a business paying rent in the property, and he may not have many options for somebody to take it on. He knows his real position is that he needs to be helpful to that tenant.
150.He went on to say:
Landlord and tenant is a partnership by any other name, trammelled by a lot of historic terminology that is unhelpful. One of the parties is called a “land lord”. That is not helpful. When the tenancy comes to an end, it is “surrendered”. It is a partnership. That stuff needs to be consigned to history. People need to understand that it is just a business partnership, and if one of your partners is struggling you need to get involved and help.
That “historic terminology” has its origins in Part II of the Landlord and Tenant Act 1954, which as Matthew Griffiths noted was “devised pre-internet and bears no resemblance to the retail market on the High Street” and was “not fit for purpose”. We were also told it was an “extremely outdated Act unfit for modern retail”.
151.Ultimately, the landlord-tenant relationship is put to the test when the tenant is experiencing financial difficulties and consequently seeks to renegotiate their lease. We took evidence from four large retailers, with long leases and upwards-only rents, who were facing that situation; Katharine Wynne of Debenhams, for example, said the company was “looking to negotiate with our landlords in order to ensure that we have a viable store proposition going forward”. The extent to which landlords were open to this seemed to vary. Tony Ginty of Marks and Spencer said:
We continue to have the conversations in terms of trying to get landlords to recognise the changing shape of the high street and the changing demands and challenges that are faced there, and in some cases they are prepared to have that conversation and think about it; in some cases, they are not prepared to do that.
Mike Ashley of Sports Direct Group said:
Everybody wants to say, “Greedy landlords”. I accept some landlords are being greedy, but the vast majority of landlords want to sit down and work something out. They do, but then we get into timeframes, investments and how we are going to do it.
We also heard that, because of the changing retail climate, parties were increasingly likely to be having an “open dialogue” and a “grown-up conversation”.
152.However, in the case of investor landlords, their own financial arrangements often limited their ability to re-negotiate existing leases with upwards-only rent reviews. Kevin Frost, Property Director at Cineworld, explained:
The upwards-only rent review machinery is a key ingredient for any landlord investor. They would struggle, probably, with the amount of capital investment that goes into property if their income was no longer guaranteed in the way it is. The challenge with that model, though, is that it does not react to the economic challenges that a tenant may face.
The upwards-only rent review debate is not a new debate. It has been raised by other tenants for some time. There is a huge vested interest among the landlord community to prevent anything happening to upwards-only rent reviews. As a 30-year veteran and chartered surveyor, I have no doubt that, if upwards-only rent reviews were somehow controlled or even banned in the leisure market, landlord behaviour would change overnight.
Upwards-only rent reviews were banned in Ireland in 2010 and, in 2004, the then Government consulted on banning upwards-only rent reviews but, in the end, decided not to do so. We note that the wider financial context in which publicly listed landlords operate, in particular the impact of reducing rents on investor confidence and share price, is also relevant.
153.From now on, Tony Ginty of Marks and Spencer said that new leases would better reflect the realities of the retail environment: “it is an entirely different scenario. There will be no long leases signed, and there will be lease breaks built in”. We heard from Mark Williams of the Hark Group that most leases were now ten years long with a break clause at five years, with the effect that upwards-only rent reviews are no longer relevant. Mike Ashley of Sports Direct Group suggested that a mechanism on which to base a lease could be “a percentage of turnover with a base rent”, Kevin Frost of Cineworld said, where possible, his company would seek CPI geared rent reviews, and Mr Griffiths advocated rent based on profits not turnover.
154.Martin Foster, Chief Executive of Lakeland Leathers, told us that when a lease was no longer affordable and risked creating losses, there were only a couple of options: “You either do a CVA [Company Voluntary Arrangement], an administration, or you go to the landlord with a pot of cash and try to buy yourself out of the lease. In reality, if you are making losses you probably cannot do the latter”. Several retailers have agreed CVAs this year and, as referred to in paragraph 14, we heard evidence from both retailers and landlords about the relative merits of the use of CVAs and the CVA process.
155.On a separate but related point, the Local Government Finance Bill, which fell at the 2017 general election, would have allowed for property owners to set up and manage BIDs across the country. Currently, they can only be established in areas where a Business Rate Supplement is in force, which is in London in relation to Crossrail. We heard strong support for the introduction of property owner BIDs, which we were told would assist in places where there was fragmented ownership and landlords needed to be identified and brought into discussions about high street and town centre regeneration.
156.Landlords are often the least visible stakeholders in high streets and town centres but are among the most important. While there are many active and engaged landlords who take an interest in their tenants’ businesses and are involved in high street and town centre transformation, there are equally many who do not. We encourage all landlords to recognise that the retail property market has changed and to take an active approach, providing their tenants with good quality properties on a flexible basis and investing in and reconfiguring properties for new uses. Further, we encourage them to fully engage in local partnerships working on high street and town centre transformation and to consider the potential for further investment to help bring plans to fruition.
157.We recommend that, in the next twelve months, the Government task the Law Commission with reviewing the Landlord and Tenant Act 1954, Part II, assessing in particular whether the law as it currently stands is impeding the emergence of a landlord tenant relationship which is more appropriate for the current retail environment.
158.Many retailers are burdened by high rents which, in addition to business rates, are causing them significant financial distress. Upwards-only rent review clauses in long leases have artificially increased rents to a level that no longer reflects commercial reality. We recommend that, given the change in the retail sector, the Government should consult again (as it did in 2004) on outlawing the use of upwards-only rent reviews. While new leases are likely to reflect the current market better, it is important that consideration is given to whether the practice should be curtailed. In the meantime, we recommend that the Government sets up a conciliation service, similar to that provided by ACAS, to facilitate negotiations between retailers in financial distress and landlords who are proving reluctant to engage in discussions or compromise on reducing rent.
159.We heard competing evidence from both retailers and landlords about the use of Company Voluntary Arrangements (CVA) and the CVA process. While we were not able to delve deeply into the issue during the course of this inquiry, we believe that it warrants further consideration by the Government. We ask the Government to provide us with its assessment of the effect CVAs are having on the high street and any consequential reforms that may be necessary.
160.The Government’s announcement that property-owner Business Improvement Districts would be legislated for in the Local Government Finance Bill, which fell as a result of the 2017 general election, was met with enthusiasm. Such a body could play an important role in bringing landlords into local discussions about high street and town centre transformation. We recommend that the Government revives the legislation relevant to this at the earliest opportunity.
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Published: 21 February 2019