Retail Landlords Pressure to Re-Base

This week we have continued to watch the debate between Shopping Centre tenants and Landlords continue to develop with Shaun Bonett joining John Gandell in objection to Solomon Lews' call to re-write shopping centre leasing arrangements.

Solomon Lew is a shrewd businessman and has been seeking to re-weight the balance of power between the Landlords and Tenants for several years, and rightly so. In shutting down his 1250 stores in late March, refusing to pay rental and standing down 9,000 employees, Lew is trying what every business owner is doing – protect the business from financial collapse. He, unlike most small tenants, has a voice in the media and is not afraid to use it.

Last week, Lew began to re-open stores and offered to pay rent in arrears based on a percentage of gross sales and said "At the end of the day, the old model of fixed rent payable in advance is not going to work''.

In my view, Lew is simply positioning himself and Landlords for a discussion. At the end of the day, Landlords are not going to accept a pure percentage rental lease which effectively exposes the Landlords to the risks of operating a retail business. This is not the Landlords expertise. The Landlord simply wants to offer the space and take a fixed fee.

Landlords have also used the argument that their ongoing improvements to Centre's justify higher annual rental increases and even percentage rent clauses. In my view these arguments will not survive much longer. If Landlords wish to extend their Centres, they will have to take a greater risk and rely less on additional rents from existing tenants.

Lew is well aware all of these arguments and will use the current opportunity to argue for lower base rents and increases linked to CPI alone. He and others like him, should win this argument as Australian retail rents, percentage rent clauses, escalations and fitout arrangements do nothing to encourage smart operators to want to open in a Shopping Centre.

Both sides however need to honour written agreements, so a transitional deal which shares the COVID pain, allows arrears to be repaid over the balance of the term and provides early access to a new extended lease at a new base rent is likely to be rewarded. If Landlords do not come to an agreement to review base rents, vacancies and incentives will skyrocket and rents will fall.

Landlords who are able to move quickly to put in place more post COVID leases into their tenancy schedules, should be rewarded with sharper cap rates (compared to those who do not) and fewer negative rental reversions. This will involve short term medicine, which is often easier to swallow when the everyone else is feeling sick.