Can’t Pay, Won’t Pay: Why June Rent Payments Are The Next Big Challenge Facing Retail

The relationship between retailers and their (mainly) institutional landlords has always been one characterised by strained relationships and confrontation. Upward only rent reviews for years and years might have something to do with that. They are both gripped in a deadly embrace which is just about to get a whole lot tighter.

A spirit of collaboration could not be further from the truth. And the next bump in the road is looming rapidly. Because just nine days after non-essential reopens, on June 24 the next quarterly rent payments will be due. And guess what? Many are unlikely to pay. You just know that this isn’t going to end well.

The landlords are usually portrayed as the villains of the piece, squeezing the poor retailers for ever more cash. But a look at March’s payments shows that, according to Retail Week, troubled retail property group Intu collected just 29% of due rent on March’s rent day, Hammerson received 37% and British Land was paid 43% of due rent between March 2 and April 30.

Monsoon has told landlords that it will shut stores if it is not offered rent waivers. And they are not alone. But this truly is rock and a hard place territory. Non-essential retailers have taken zero cash through their stores since the last rent payments at the end of March so do not have the cash flow to pay.

Meanwhile, landlords risk breaching their banking covenants if they suffer a second successive quarter of reduced rental payments. It’s a high stakes game of poker with the survival of both parties literally on the table.

That the U.K. government saw fit to intervene and side with retailers in extending the eviction protection until the end of June only adds fuel to the fire. If ever there was a need for collaboration this is it. And on the face of it, it is hard to see a resolution to the impending firestorm.

According to Knight Frank, “between 10% and 20% of retail and leisure/F&B operators will meet their June rent obligations in full and on time”.

But it’s not quite as straightforward as a divide between essential retailers – grocers for example are expected to pay in full – and non-essential retail. For there are many in the former category who were allowed to stay open but saw nothing like the usual footfall.

For example, AS Watson (owner of Superdrug and Savers) has already indicated that it will only pay 25% of rent this quarter. With the majority seeking concessions, rent holidays, or a shift to monthly payments.

Turnover rent

And of course, all this is fuelling the growing argument to introduce turnover rent agreements. It is thought that Mike Ashley’s Frasers Group, Pret A Manger and Theo Paphitis’ retail group are all having similar discussions with landlords.

Knight Frank asserts that while turnover rents might appear to be the perfect solution, they are anything but.

“Total transparency is still a prerequisite for turnover rents to work and in many cases, this is still lacking. Retailers are understandably protective of their trading data and will always seek to limit its release into the public domain over concerns of miss-use”.

And we haven’t even factored in online shopping and sales attribution to individual stores yet.

Landlords have even been in talks with the government to offset reduced rent payments with the Treasury subsidising the shortfall through a furlough type scheme. In other words, the taxpayer helps to bale out the industry.

This is a global issue

And this of course, is not an issue confined to any one country. In the U.S. according to The Washington Post nearly half of commercial retail rents were not paid in May. Even the likes of Starbucks reporting that they will be unable to pay their property bills on time.

They have written to landlords to request concessions from June 1 and for them to run for twelve months. So this problem isn’t going away any time soon.

The knock on effect from which could be devastating as landlords risk going bankrupt, commercial real estate property prices fall and jobs are lost.

No wonder governments around the world are so anxious to get their economies going again, it’s just that they have to get the timing of doing so absolutely right. Because the consequences of not doing so are too terrible to imagine.

It’s almost as if they can return to either a healthy population or a thriving economy, but not both. And in such circumstances, there will be no right answer.