Changing the rent days has a price
Of course retailers don’t like paying their rent three months in advance - many of them are not sure they’ll still be in business in three months’ time. But a lease is a contract and it’s too late to tear it up now.
There is a growing lobby of property users, mainly retail, who think the economic slowdown they should allow them to pay the rents on their premises on a monthly basis rather than the centuries-old practice of paying three months’ worth on each of the quarter days.
Perhaps the retailers have got so used to writing to their other suppliers’ demanding price cuts they feel entitled to change any contract retrospectively, but they must realise that their gain from rewriting the rules would be the landlord’s loss.
First, it is worth pointing out that the current - almost universally used - system does not mean rent is paid three months in advance on a rolling basis. Only the last day’s rent is paid so far ahead but the average upfront payment is half of that, ie, about 46 days and the first day’s payment has no advance element.
It is not like a residential landlord demanding two weeks’ rent as deposit against bad debt or breakages: by the end of the quarter there is no credit on the commercial tenant’s payment. But there is a cashflow advantage to the landlord that is taken into account when setting the rent.
To produce the same return, monthly rents would have to be higher. Before leases were standardised, valuers had tables that showed the difference in yield between rents paid quarterly-in-advance and quarterly-in-arrears and the latter had a higher yield giving a lower value.
If occupiers wanted monthly rents they could have paid more and negotiated that at the start of their lease. Landlords would resist conceding the demand, however - even for a higher payment - because standardised leases make property a homogenous investment.
If retailers had negotiated turnover rents - as they do at many major shopping centres - their property cost would now be falling in line with sales. Landlords are being squeezed too, however: developments and empty units are hard to let and rent rises less than expected. And they have suffered severe falls in capital values, potentially threatening their borrowing covenants.
But if a landlord goes bust the property is still there; if a tenant fails, the property is empty and there is no rent. A tenant in trouble might thus be allowed to pay monthly rent because it is better than receiving nothing, but the rest of the retail world should not expect such concessions.
