Always check the small print
Published:  16 November, 2007

Rebecca Evans 0n the effects of expected changes to rents and rates

Rising retail rents - particularly for high street locations - are often cited as a thorn in the side of UK retailers. Wine Cellar, for example, has found that while rents for its units on suburban shopping parades have increased by 3 -5 per cent each year, high street locations are attracting rent increases of between 5 and 10 per cent .

Head of property Paul Richards says this "makes it more difficult for those stores to provide a positive contribution to the business as rent and rates come off the store's bottom line".

British Retail Consortium head of property Paul Browne confirms the upward trend. He says: "Over the

past four of five years we have witnessed a considerable escalation in property costs, rents and rates. Rates are a product of the rent process so they are linked. Most businesses have seen their rates go up.

"Britain has had a buoyant market because of the general state of the economy and also because of a shortage of good space

due to

a restrictive planning regime. Rents have varied enormously - they have been well in excess of inflation. Some retailers have seen 50 per cent increases at rent review and a lot of small businesses have not been able to absorb the cost. We have seen a lot of independents fall off the high street because of property costs."

All this, though, could be about to change, Browne says. "The property market is cyclical and we've gone beyond the top of the cycle into a slowdown.

Business rents - apart from high-quality office space - are likely to come down. Over the

past 12 months, landlords have been working to protect the rental level, but rents are beginning to fall.

"There will be some local fluctuations and variations on that but, broadly speaking, it's happened relatively quickly because of the global credit crunch."

Negative growth

In September, analysts the Investment Property Databank registered the first negative growth in the UK property market for 18 years "so it's technically correct to say we're in a recession", Browne says.

While a decrease in rental prices will be good news for those just setting up in business, it's not so encouraging for tenants tied into "upwards only" leasehold contracts. These contracts, which are fairly widespread across all sizes of retail space, stipulate that at review, rental charges can only go up or stay the same, regardless of market conditions.

So a tenant who signed a five-year contract in 2005 to pay £100 per square foot will have to keep paying that until 2010, even if the market rates drop to £85 during that period. Meanwhile, a competitor could secure a deal to pay the £85 a square foot. Again, smaller retailers will be hit much harder by the situation.

Browne says: "It's a difficult one. We would like to see a move towards the end of upward-only rent review clauses ... my feeling is the government wants to see fewer uses of these clauses as well."

Retailers would be well-advised to look out for such clauses when signing contracts, although larger retailers are likely to have more clout in negotiations.

Another, even more significant, challenge facing retailers next year will be the introduction of changes to the rules on empty property rate relief.

Currently, leaseholders do not have to pay any business rates on vacant ≠properties for the first three months, and then pay 50 per cent after that. But from April 2008, the full rate will apply after the initial

three months.

The government thinks the changes will cut the number of shops standing empty for long periods . But the BRC's Browne thinks it has fundamentally misunderstood the reasons this happens.

"The government has demonstrated a failure to understand how the property market works. It says that it wants to bring empty properties back into use.

"We support that, because empty shops are not good for the economy or for retailers. But we think taxing empty properties is the wrong way of going about it."

Double whammy

Browne says there are two reasons

properties lay empty for long periods of time - either there is a weak market in the area and tenants are hard to find, or tenants are tied in to a restrictive lease, and the property cannot be easily re-let.

Browne describes the second instance as a "double whammy" for tenants. "They were making a loss out of that business. At the moment, they still have to pay rent but at least they are only paying half rates. But, from next year, they will have to pay full rates as well.

A lot of business

will be hit hard," he says.

The rules will be enforced from April, despite vocal opposition from the BRC and other trade bodies and businesses. "To be honest, the government wasn't interested in our arguments. It's nothing more than a money grab - it'll generate £1 billion," he says.

The current climate and upcoming changes to rules on rates mean there has never been a better time for retailers, large or small, to join trade organisations such as the BRC or Association of Convenience Stores to make sure they are well-informed and

represented in discussions with government.

And there is proof that organised campaigns can help ease the financial pressure on retailers. The

BRC's campaign to persuade landlords to accept monthly, rather than quarterly, payment of rent has been enthusiastically supported by many retailers. A change to monthly


cuts costs and frees up cashflow, say retailers.

Wine Cellar's Richards says it has had a 60 per cent success rate in persuading landlords to change lease terms to monthly payments.

Browne says: "I haven't spoken to a single retailer who hasn't been supportive. It's been a highly successful campaign for the BRC, and, outside of the sector, about 14 other trade associations and small-to-medium business have also backed the campaign."

Browne says it has become common practice for new retail leases to include monthly payment terms.

Around 20 per cent of existing leases have also been successfully changed, he adds.

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