A Practical Approach to Rental Agreements is Needed
Date : 16 February 2010
The news from the Central Bank that Ireland will move from recession to recovery by the end of the year is obviously very welcome. However, retailers have suffered serious damage to their business over the last two years, and their recovery will be slow.
The biggest single impediment to a recovery in the fortunes of retailers and their staff is the excessive levels of rent that they have contracted to pay.
The growth in rental levels in the years from 2005 to 2008 has resulted in a situation where the ratio of rent to turnover is severely out of kilter and unsustainable, and retailers will continue to struggle unless the core issue of rents is addressed and dealt with.
Mediation and a joint approach to solving the problems faced by landlords and tenants is what is needed to address this problem. In most cases, when each side tackles the issues in a mature and non-confrontational matter, mediation does work.
Landlords and tenants
However, for agreement to be reached, both sides need to be cognisant of the needs of the other. Landlords must be confident that tenants have taken the appropriate measures to cut their costs, refocus and manage their business accordingly.
When a landlord is considering supporting a tenant, he must be confident that the tenant will survive, because there is little point reducing a rent for a retailer who will not continue in business even after assistance. It is also important that tenants are completely honest with themselves and confident that their business will overcome the downturn.
Landlords have rights and problems as well, and too many retailers have ignored the difficulties faced by them. Some expect help with no recognition of the difficulties facing their landlords, but this approach is a recipe for failure, and neither side will gain from it.
Landlords borrowed money based on contracted rental levels and they in turn have finance commitments that they must honour. They must renegotiate with their lenders to reflect any deal done with their tenants, and financial institutions must also play their part in this process by granting landlords flexibility in their dealings with tenants.
When considering the various options open to retailers, it is important that in addition to consulting a property adviser, accountants and solicitors should also be involved, as their skills are needed to present the required information and to protect the interests of all parties involved.
As part of the review process, it may be decided that liquidation or examinership is the most viable option for the trader. The recent Supreme Court decision with regard to the examiner’s right to disclaim leases should alert landlords to the importance of working with tenants to try to address their mutual difficulties.
Difficulties retailers face
In looking at the difficulties retailers currently face and will continue to face for the immediate future, I believe that, when drafting new leases, landlords and their legal advisers have an opportunity to take a radical look at how rent review clauses are drawn up.
The historic approach based solely on comparisons is not working. Tenants often face increases decided by awards from arbitrators (who must follow the criteria specified in the lease) that they simply cannot afford.
Traditionally, leases normally exclude rental value attributable to good will, and therefore disregard the circumstances of individual tenants.
This just compounds the difficulties of tenants and creates more conflict between two parties - tenants and landlords - who really should be working together to address their difficulties.
The assumptions and projections on which people made decisions prior to the recent past no longer apply. The rapid deterioration in the economy, the collapse of retail spending, consumer confidence and the growth of cross-border trade have all combined to make any decisions to expand and invest, both by landlords and tenants, look like poor ones.
Yet existing rent review clauses make no provisions for such a catastrophic combination of events, and this results in tenants facing increases on reviews that their businesses cannot afford.
We now have an opportunity for level-headed, pragmatic people to examine the best practice of other countries, to consider the problem with an open mind and to implement more appropriate solutions for the future. The landlord who takes this view is sure to have a competitive advantage in the market when the recovery begins.
Notes
Keiron Diamond, Director & Head of Retail
Sunday Business Post
14 February 2010