The Casualties

2012 was a hard year for the retail sector but 2013 is shaping up to be an even tougher year for High Streets in the UK.  In January alone we saw Jessops, HMV, and Blockbuster all enter into administration.  Of course, these are not the first retailers to suffer following the global economic downturn in 2008.  Woolworths was the first big name to fall with smaller chains such as Peacocks, Clinton Cards and Barratts following suit.  In November last year electrical giant Comet collapsed with the loss of 6,900 jobs.

However, what is particularly worrying is that these most recent casualties represent former stalwarts of city centre shopping, with large property portfolios.  As a result, landlords who own retail units in city centres will be looking on nervously as the future of High Street shopping seems to be hanging in the balance.

According to CBRE, the property agent, retail administrations since the onset of recession in late 2008 have cost 198,000 jobs and £1.48bn in rent for landlords.  All 187 of Jessops' stores were closed soon after PwC was appointed as administrators and if HMV and Blockbuster also fail the total store closures could reach almost 1,000.  The Financial Times is reporting that this would leave the retail vacancy rate at a record 16.5%.

With the trend for internet shopping set to continue (retail research group Verdict estimates that the internet will account for about £1 in every £8 spent in the UK this year) can the High Street survive? 

Saving the High Street

In March 2012 the Government announced it was to accept all the 28 recommendations made in Mary Portas’ high street review, which included:

• Establishing National Market Days;

• Removing unnecessary byelaws that hinder traders and businesses;

• Encouraging local authorities to sign up to the Leasing Code; and

• Creating 'Town Teams' in charge of operational management and development of high streets.

However, in order to stem the tide of retailing failures, landlords will have to work with businesses in order to encourage would-be tenants to open stores when many larger chains have a surplus of physical outlets.

This might take the form of shorter leases, longer rent-free periods or a low base rent with a turnover rent provision so that rent is linked to the tenant's financial performance – after all, a lower rent is better than no rent at all. 

Another possibility is allowing a tenant to pay their rent monthly, rather than quarterly, which would allow tenants to budget better and prevent that "big financial hit" that comes every quarter day.  Whilst this will help the tenant it might also be beneficial to the landlord in the event that the tenant goes into administration.  When a company appoints an administrator, that administrator will incur liabilities to third parties in order to continue trading.  This might include purchasing stock/materials or paying utilities etc...  Under the Insolvency Act 1986 the administrator must discharge these liabilities before discharging other liabilities of the company, including any liabilities incurred prior to the appointment of the administrator. 

So in a situation where the lease provides that the tenant must pay rent quarterly, in advance, if the tenant fails to pay the rent on the quarter day and appoints an administrator shortly after, then this would mean the quarterly rent was incurred prior to administration and would therefore rank below any expenses incurred during administration.  Furthermore, because an administration moratorium suspends a landlord's right to forfeit a lease, a tenant who appoints an administrator shortly after a quarter day can enjoy the remainder of the quarter effectively rent-free.  If, however, the rent was paid monthly, the longest this 'rent-free' period could be is one month thereby reducing the extent of a landlord's exposure to an unpaid rent period.

Landlords' are feeling vulnerable in the current climate and would be well advised to negotiate an appropriate rent deposit, rent guarantee insurance and a guarantor for the tenant's obligations if possible.

The Future

Local governments and investors also have a role to play in the way they design their High Streets going forward – people will be much more likely to visit the local High Street (and more often) if their movement was not solely driven by shopping.  The Royal Town Planning Institute has recently suggested that town centres should offer more variety, such as health, education and leisure facilities. 

The High Street will survive, in one form or another, and every cloud has a silver lining:  the demise of national chains has created an opportunity for smaller independent shops to move into previously unaffordable city centre locations, and given the high retail vacancy rate, they have a stronger bargaining position than before.