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Rent reviews remain a bone of contention

Published:  17 June, 2010

Rent reviews are still the biggest stumbling block to better landlord-tenant relations, a recent BPF conference found

JD Sports chairman Peter Cowgill launched a scathing attack on shopping centre landlords at this year’s British Property Federation conference in London.

He began by warning that retailers were still cynical about landlords’ attempts to adopt a more conciliatory approach to tenant relationships. “Landlords have come closer to their tenants not out of natural philanthropy but out of commercial necessity,” he said.

“And from what I can see the whole concept of the property industry as a market is a complete misnomer,” he added. “In a market supply and demand dictates price but I’ve said before that signing a lease is like being strapped to a spacerocket.”

The debate over upwards-only rent reviews has tailed off over the past few years, but Cowgill attempted to inject new life into it. “Rent reviews are the biggest source of manipulation you can face,” he asserted. “We have experts who’ve never left school deciding rents. A centre can be 20 per cent empty but we’re still being presented with upwards rent reviews.”

As an example of this manipulation, Cargill said that on a number of sites JD had been allowed to continue trading at zero rent once its lease had expired, because landlords were reluctant to set a new rent which could be used as evidence of the ‘tone’ of rents in a centre.

“If we’re uncompetitive with our products we have to adjust our prices accordingly but that doesn’t seem to apply to landlords. The law has to change,” he said. “Upwards-only rent reviews are a nonsense and they fly in the face of commercial reality.”

As an alternative Cowgill advocated even shorter leases or leases with frequent break clauses, when rents would revert to open market value. “We’re supposed to be in a tenant-friendly market yet we still can’t get out of leases, and market rents don’t prevail unless we’ve come to the end of a lease. At the very least breaks have to become more frequent,” he said.

He pointed out that the JD Sports portfolio contained at least 30 stores which were uneconomic, but where the company was forced to just sit and watch the clock ticking down until the day it could get out.

He said that the spate of CVA’s and pre-pack administrations were a direct consequence of this system of onorous lease terms, but they only served to distort the level playing field among retailers.

“Landlords have lost hundreds of tenancies where retailers have had to dump the whole company. A direct competitor of ours, JJB, was able to dump 100 leases at a stroke so it seems it’s an advantage if you go bust and it’s an advantage if you have no stores. The ones at a disadvantage are the successful retailers and it pays to be a weak retailer because that gives you more lease flexibility than otherwise.”

Making the case from the landlord’s point of view, Tony Brown, chief executive of Lend Lease Investment Management predicted the demise of the traditional ‘institutional’ lease. “The 1954 Landlord & Tenant Act is irrelevant to most of the leases we grant,” he said.

According to Brown about a third of the leases Lend Lease grants are on turnover terms and disclosure of sales data is a condition of all the others. “We know we can manage our centres effectively to generate the upside,” he said. “Generate sales and you grow rents.”

And he enjoined other landlords to embrace change with shorter leases and greater use of turnover rents, but he conceded “The challenge is to bring non-institutional and non-major property company landlords along with us.”

So what of the advisor? DTZ director Peter Preddy told Shopping Centre there was a ‘slow decline’ in traditional rent review business. “We’re still seeing some 10-year leases but they often have five-year break options,” he said.

One exception, though, is in larger units where DTZ is noting an increase in competitive bids, and a firming in lease terms. But echoing Brown’s experience at Lend Lease he said: “We’re seeing more turnover top-ups, which is all about aligning the landlords’ and tenants’ interests. But the key is to set the turnover percentage at the right level.”