Retail ‘Armageddon’ and lease renewals – to let or not to let?

What’s changing and why?

It used to be the case that the lease renewal process was a predictable game. Tenants would propose certain terms for the new lease, landlords would counter-propose others, and the result of the agreed renewal lease would be a compromise somewhere between the two.

Now, each party is calling the other’s bluff much more than before. The squeeze on the retail sector means tenants cannot afford high rents or to be tied into long lease terms – however, landlords are pushing for the opposite to provide them with certainty of rental income. It is now a real prospect that if the lease terms proposed by the tenant are not accepted, that the tenant will simply close the shop and walk away altogether. No landlord wants retail units to be rented at less than market value, but an entirely vacant unit is much worse. The competing interests of landlords and tenants is nothing new – however, the high street is seeing unprecedented levels of shop closures and the impact of this is filtering into all areas of the retail sector.

With many shops feeling the effects of a squeeze on profit margins, the decision to renew a lease (regardless of terms) or consider closure is increasingly difficult for retail tenants. This can mean that tenants drag their feet during lease renewal negotiations in order to access trading levels and, particularly within shopping centres, changing levels of footfall to decide whether to close shop if it is not profitable enough – all to the frustration of the landlord.

Lease renewal claims

Negotiations can take longer than before, or even reach a stalemate. As lease renewals increasingly cannot be negotiated, settled, and completed between landlord and tenant (and their respective agents, if any), more lease renewal claims are being protected by way of issued proceedings. This is resulting in further delays while claims are listed for directions or hearings – which are subject to the Court timetable.

For either tenants or landlords approaching a lease renewal, it is clear that the negotiations will not be as formulaic as before. Retail ‘Armageddon’ is changing the balance of negotiation power between landlord and tenant, and anyone involved in lease renewals must be prepared for harder talks going forward. What is clear is that further thought is needed as to how to approach lease renewals in the retail sector, and both tenants and landlords should give consideration to their aims well in advance of any deadline.