Time to put landlords and tenants on the same side

Since the demise of Woolworths, I have spent much of my career at Deloitte reviewing the store portfolios of distressed retailers. Acting for administrators I have been both a landlord and a tenant; elsewhere in my career I have represented occupiers and managed retail portfolios for investors. I have experienced the landlord and tenant relationship from all angles, and it’s a relationship which is under strain like never before.

Tracing the relationship back to its origins is instructive. In Saxon law a landhlaford was a proprietor of land. These were generally members of the warrior class whose role was to protect the land and their tenants from marauders. In return for their protection the tenants would pay a tithe based on a proportion of the crops grown on the land. The landlord’s role was to enable the tenant to be economically productive, the tenant’s rent was limited to a proportion of what the land was capable of producing.

Nowadays, this might seem like a pretty balanced relationship, especially when the current wave of failures, and the constant demands for concessions by struggling occupiers, seems to be threatening the fundamentals of the modern commercial model. While retailers argue that they won’t survive if they have to pay their contractual rents; landlords, understandably, reply that they can’t survive otherwise - and both parties complain about business rates! It’s no wonder that landlords now feel that they are the ones that need protection from marauders!

With the Christmas quarter day being the next big test for retailers - is now the time for a reset on the tenant / landlord relationship?

How might the ancient tithe concept translate to today’s market? Traditionally, a tithe is interpreted as 10% and, over time, I have come to look for 10% of gross turnover as a crude, but reasonable, benchmark for rental affordability. There’s very little science behind this and a reasonable percentage differs wildly between, say, a supermarket and a high-end jeweller but as a rule of thumb it generally seems leave enough margin to meet all other costs (including, of course, significant amounts attributable to business rates.) Increasingly, my reviews have seen portfolios where rent has crept up to 20% or even 30% of sales making profitability all but impossible.

This is, by the way, very seldom due to landlords increasing rents – it’s simply that the maths was wrong from the outset and both parties have been complicit in turning a blind eye.

Take a sandwich shop with an annual rent of £75,000. By my measure that would be £750,000 worth of sarnies that need to go out of the door every year – a little over £14,000 per week (every week), £2,000 a day (assuming a 7 day week). Based on an average spend of £6 per customer that’s 330 customers a day. Is that feasible? How realistic and robust are the assumptions of both sides when a tenant first enters into a lease?

What can landlords do? Given the way that commercial property investments are generally funded and valued, the answer seems to be very little. Many landlords have invested huge amounts of time and money working with retailers to make their schemes the most attractive possible destinations. But creating a fantastic environment in which people can touch and feel products sadly does little for the bottom line of retail tenants.

Customer demand and turnover at store level are simply no longer sufficient for many retailers to be able to meet their rental obligations and turn a profit. In response landlords can’t simply cut rents because of the inequality that creates amongst tenants.

There are no quick fixes but both sides need to start the conversation. We need to move away from the combative and adversarial relationship that has become embedded in the industry and work together to develop new rental models that will be sustainable in the long term if both sides are to stand together to repel the marauders from online.


Hugo Clark – Director, Deloitte Real Estate

Hugo Clark is a Director and Head of Retail Property Strategy for Deloitte Real Estate. Hugo has extensive commercial property asset and investment management experience and specialises in distressed and turnaround real estate situations with particular focus on the retail sector.

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