Angela Sheen, Associate Partner
There’s blood on the High Street, with each month bringing the demise of another household name. Even the much-trumpeted shops initiative led by Mary Portas is struggling to save retailers. But there’s another victim of the retail downturn that rarely gets a mention, let alone any sympathy. Here Angela Sheen, of Birmingham-based chartered surveyors and retail specialists Johnson Fellows – takes a look at the crisis from the landlord’s point of view.
Behind the headlines there’s another side to the crisis on our High Streets. Retailers aren’t the only ones that suffer when administrators are appointed. Landlords worry about the impact it will have on their investment, the value of having an unoccupied property and the running costs until a new tenant is found. More often than not have they have leases, mortgages or loan commitments that need to be repaid and these payments come from the rental income. If there is no rental income, landlords may struggle and may not be able to honour financial commitments which could ultimately lead to the same fate suffered by – bankruptcy or liquidation. Because when rental income is lost, the running costs to maintain a void property remain.
There is the potential for the building insurance premium to increase to consider the empty property. Insurers often impose strict requirements on landlords to ensure that empty properties are secure and all risks minimised. Some of the typical risk requirements are:
- Securing the premises to include boarding up of windows, shop fronts, doors not used for ingress/egress, sealing letterboxes and openings
- Draining down of all water systems
- Clearing the premises of all contents and combustible material
- Weekly security patrols of the premises
In the cases where retailers are collapsing with little or no notice, landlords are left to foot the bill with usually no realistic likelihood of recovering the cost. Tenants who leave at short notice often do not leave the premises in good order, leaving the landlord to deal with the mess left behind. In some cases the costs can be significant. There are costs to clear the premise of any goods, fixtures, fittings and rubbish, plus costs to undertake necessary repairs to put the premises into a condition so that it can be marketed. Where tenants have been in occupation for a number of years, there would have been repairing covenants in the lease requiring the tenant to keep and maintain the premises to a certain standard. This could include plant and services, heating and cooling equipment, fire safety systems – all of which, if the tenant failed to maintain, or the equipment was at the end of its life, the burden would now fall to the landlord to reinstate, replace or repair. Under most leases, landlords have the ability to recover these costs by way of a Schedule of Dilapidations. However, when tenants go into liquidation or administration, landlords’ chances of recovering any debt are negligible. Then there are marketing costs to re-let the property and the on-going liability for business rates. Whilst landlords can benefit from three month’s Empty Property Rates relief, in these trying times empty property is taking longer to re-let thus leaving shops empty for extended periods and landlords having to pay out in the meantime. Landlords will also have to pay for service charge liability where properties are in multi-let schemes or shopping centres. As the service charge for a centre or property will have budgeted for contract services, repairs and maintenance, the amount attributable to the void premises has to be paid regardless of whether a tenant is in occupation. If a tenant doesn’t go into administration but closes the business or ‘does a runner’, there is a chance of tracing the tenant to collect any unpaid debt or liability. However, this too comes at a price. There is the initial investigation to find the tenant at a known address and to confirm if there are any assets. Further steps to collect any debt will require solicitors, court action and/or bailiffs, which will result in potentially large legal and professional fees. We have had a client who located a tenant and received a court order for payment. Unfortunately the debt has still not been paid. The process has taken well over a year and the client has been out of pocket for legal fees and it is likely they will not be able to recover these from the tenant.
This proves that times are just as tough for landlords who are often seen in a bad light as the ones causing tenants/retailers to go bust. Here at Johnson Fellows we act for a number of landlords who face many of these issues. We strive to minimise the client’s liability and keep costs as low as possible. When we are aware that a tenant is struggling financially we will advise our client of the potential risks and devise a solution that is beneficial to both the client and the tenant. Some things that may be considered would include offering the tenant a reduced rent for a specified period, monthly rents, or even a rent-free period. This will help the tenant financially but ensure the tenant remains in occupation, which is vital for the landlord. Payment arrangements are being offered more regularly as tenants’ arrears grow steadily. In the past landlords would have taken a more aggressive approach to recovering any debt or arrears by instructing bailiffs or other action. A softer, but firm, approach is now needed to alleviate the financial pressure being felt by both tenants and landlords. The landlord may offer to market the premises whilst the tenant remains in occupation. This enables the tenant to trade and the landlord to receive the rent until a viable new tenant is found to take over the premises. This ensures there is little lapse in the rent being received. Where properties are void or on the market, we will seek to find a temporary letting for a considerably reduced or peppercorn rent. There are a lot of retailers and charities now that prefer to take short term, temporary lettings to avoid having to enter into long-term contracts. This is ideal for landlords where there are difficult properties to let or if they have been on the market for a long time. There is also the added benefit that the tenant will assume the rates and service charge liability and maintain an occupied presence in the property.
As managing agents we are often privy to information about retailers going into administration. When this is known we will advise clients to take immediate action to seek recovery of any arrears or debt prior to administrators being appointed. This will at least ensure that money owed is recovered. It is unlikely anything will be collected once administrators have taken over.
One of the key aspects of the tenant/landlord relationship is communication. It is easy to forget that the tenant is actually a person running a business, trying to make ends meet. If there is a direct line of communication this will ensure that we understand where the tenant is coming from, what the issues are (hopefully beforehand) to enable us to be more pro-active for our clients. My approach is to know what the client wants to achieve, understand the tenant’s needs and work with them both to reach a successful outcome. When I first moved to England in 2007, I was surprised at how different the landlord/tenant relationship was from what I know it to be in America. The most obvious thing to me was the perception tenants had about landlords, who are seen as the bad guy, the one who didn’t care about their tenants but only the rent they received. So long as the rent was paid, the landlord was happy. This couldn’t be further from the truth. Perhaps it’s the British way of not showing all of your cards that leaves tenants wondering if landlords really do care. What I have learned is that with a little time, friendly conversation and some understanding, you can develop a relationship with a tenant who then appreciates and respects what the landlord is trying to achieve. It is all about communication and taking the time to listen. My approach, although not suited for some, has proven successful. It keeps both tenants and landlords happy and if there is a problem, tenants are comfortable enough to contact me to discuss it. This keeps the line of communication open and tenants feel there is a direct link to their landlord and that they are being heard. Despite the perceptions, the landlords aren’t the bad guys. They have the same struggles, financial strains and concerns as everyone else. They just aren’t being considered when the focus is primarily on retailers and commercial tenants trying to make it in today’s tough times.