Retail Landlords - Villains or Visionaries?

Understanding the Dynamics of Retail Landlords and Tenants 

While host Gary Marshall usually advocates for retail tenants, in this episode of That Retail Property Guy he offers a deep dive into the retail landlord's viewpoint. The discussion covers various types of landlords, from long-term, stable investors to short-term, high-risk takers. Gary also explains the importance of leases, the Landlord and Tenant Act 1954, and the implications of lease terms. He highlights the various challenges landlords and tenants face, including changes due to external factors like COVID-19, financial obligations, service charges, and asset management. This comprehensive episode aims to enlighten listeners on how both parties can coexist harmoniously in the retail property landscape. Tune in for a balanced, informative discussion that sheds light on the important role landlords play and the expectations from tenants amid a rapidly evolving retail environment.

00:24 Championing the Tenant's Perspective

00:37 Exploring the Landlord's Side

00:41 Types of Landlords

01:55 Lease Obligations and Rights

03:31 Impact of External Factors on Landlords

05:19 Service Charges and Management

09:30 Landlord Inspections and Lease Expiry

12:03 Conclusion and Final Thoughts

Episode link: Landlords, tenants, and leases https://bit.ly/42BJSvE

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Transcript

0:00

Welcome to That Retail Property Guy with your host, Gary Marshall. In each podcast episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant. Sharing stories and insights through Gary's unique lens, we hope you'll be entertained, enlightened, and maybe a little inspired. Generally I tend to champion the tenants side of the landlord and tenant equation. There are lots of aspects about the tenants side of this business, which really need a voice. And that's where I come in to make things balanced. This episode is more dedicated to the landlord side of the equation. Landlords come in different shapes and sizes. Some landlords they're in this for the long term. They see their tenants as business partners. They're looking for long term stable relationships with a guaranteed income flow, which they can rely on time and time again. These landlords tend to be pension providers, relying on the income in order to then provide an income to hundreds or thousands or millions of pensioners across the land. Other landlords? Take a more short term, take a risk kind of view. They're prepared to consider tenants who are unproven, who don't have the credentials, who aren't blue chip. They're prepared to consider new businesses, which are not yet established. They're prepared to consider opportunities. for change. It generally means that they're interested in taking a higher rent. It generally means that they have to accept occasionally they're going to have empty stores as the turnover of failed businesses may be quite high, but landlords in general are a blend. Any retail landscape, any town, any retail park needs a combination of large landlords with a long term view and other landlords with a more high turnover viewpoint. Now an obvious point to make is that all landlords are bound by the lease, same as the tenant. It's a contract and they both signed up to it willingly. And in the same way that if one tenant assigns their lease midterm to another tenant, the new tenant is still bound by the lease. By the terms of the original lease, the same applies to the landlord. If one landlord sells to another landlord, the new landlord is still bound by that original lease. They don't get to rip it up or change it. They have to respect the five yearly rent view pattern or the break clause or the quarterly payment dates. And of course, they have to respect. They don't get to change it. The Landlord and Tenant Act 1954 protects many tenants against unscrupulous, overbearing, or misguided landlords. It gives the tenants rights to renewal at expiry, which applies to most but not all tenants and doesn't apply at all in Scotland. But one opportunity it does give a landlord at expiry is to take possession if the tenant has been at fault, such as late payment of rent, or if the landlord wants to use it themselves or redevelop it. But of course, in that sense, the landlord must be able to prove that intention. They must be able to show plans and available funding. They must be able to deliver on it. Landlords in general have a sizable stake in our built environment. If the risk is too great, they wouldn't design, fund and build great spaces. And to be honest, older retail stock soon looks pretty tired. The landlords need to reflect that there are probably going to be changes, like the movement to shopping online or click and collect. They see numerous retailers shuttering up or going into administration for reasons that are beyond their control, not related to the landlord at all. And these could be higher taxes or the introduction of different rules on national insurance or the responsibility for the recycling of packaging, changes in customer tastes or customer shopping patterns. COVID was a great example of this. Some landlords saw smaller tenants go bust, or at least fail to pay rent. During the pandemic, some notable landlords and hats off to them voluntarily offered rent free periods even to large tenants. They saw the likely impact on their preferred business partner and decided to take a hit to their own bottom lines to share the burden voluntarily. Others were less flexible. They read the lease and found no obligation to allow a rent free. No reason to help the tenant who had willingly signed that contract. It wasn't their problem. The Times famously dubbed one of the biggest landlords in the West End as the meanest landlord in Britain for failing to accept any variation in payment terms from their tenants during the pandemic. But maybe it's not a question of morality. It's about cash flow. The landlord's own obligations. Maybe they have bills to pay. Some smaller landlords are family trusts or small private pension pots. Maybe they just can't absorb nil rent periods. Others are larger, but still pension funds. Providing an income stream to many of our nation's pensioners. The cashflow is critical. Often a lease contains an obligation for repair. A good tenant should know if their lease is internal repairing or full repairing, and know what's included and what's excluded. But many landlords often retain a responsibility for common areas. which might be a common roof or a stairwell, a forecourt or a delivery yard. But as the landlord's scheme gets bigger, this retained management could extend to a vast car park, security, landscaping, marketing, all of which require management, which costs money. So they create a service charge clause within the lease that the tenant signs up to. Now, the Service Charge Clause in many leases can run for many pages, detailing the tasks to be undertaken, the proportion of the cost to be allocated to each tenant, and the annual or other period for the frequency of the bookkeeping. And then many landlords then outsource the management and bookkeeping task to third party managing agents, some of whom are adept and competent A landlord should take greater responsibility for their agent's practices, and a tenant should be wise to agents who misbill, misallocate, chase arrears which are not due. More on this in another episode, or maybe two. The landlord usually retains some powers or controls. They might specify a limited use clause, and insist on giving permission or consent for any changes. The same applies to cases where a tenant wants to sell their lease, commonly known as assignment. The landlord probably retains some rights to withhold consent in certain circumstances. But a smart tenant checks the lease to establish exactly how far those rights stretch. In some cases, the lease will say Consent not to be unreasonably withheld. So the landlord needs a robust and reasonable basis to deny consent. And it's not only tenants who sell their leases mid term. It's common for landlords to dispose of buildings and retail parks as objectives or funding changes. As mentioned earlier, the new landlord is still bound by the terms of the existing lease. They can't arbitrarily change it. But they do have to give clear instructions on the new who and how to pay. And though many disposals like this reach completion on a rent day, a landlord has to realise that sharing the news with the tenant at the 11th hour is probably too late. It's unreasonable. The diligent tenant has probably already arranged for the rent to be paid. But it's going to reach the existing, i. e. the old landlord's bank account. It could be too late to recall it or divert it. There's a whole episode in the management of landlord changes, the risks for both the landlord and the tenant in delivering the change from the old landlord. to the new landlord. The best practices, the bumps in the road. Check that out in the show notes. Now some landlords are empty shells, literally empty. Tax vehicles with no office, no staff, no phone numbers. In some cases these could be dodgy offshore funds for a shady organization. And the revenue services, particularly in the Republic of Ireland, are very hot on this. Others are simply part of a complex corporate structure. One of the biggest retail landlords in the UK at present is Realty Income, a US based fund. But their corporate structure is immensely complicated, and takes a while to establish the links back to the party giving instructions. An umbrella landlord, where the controlling interest over smaller tax vehicles is held in a different company, often muddy the water further by having a sister organisation do the asset management and a further outsource to a managing agent to handle the invoicing. Following these threads can take time, but a diligent tenant should always strive to ascertain that anyone giving instructions is actually authorized to do so. To establish the legal link between the party giving the instructions all the way back to the actual legal landlord. And from time to time, even though the tenant is in occupation of the premises, a landlord has the right to inspect. Generally, the lease will provide that there are terms for this. The landlord's request must be on reasonable notice. This generally means that a landlord shouldn't turn up and knock on the door and expect or insist on being granted access that moment to all areas of the property. Bear in mind that the tenant could have sensitive information visible around the building. There may be stock that has to be cleared away. They might just be busy with customers and not be in a position to escort the landlord or his representative around the building in that moment. So, reasonable, usually 24 hours notice minimum to gain access for an inspection. And a landlord should also consider what's going to happen at expiry. They should know far in advance whether they have plans to redevelop, or whether they don't. If they don't have robust plans which are demonstrable and proven, and can be evidenced with funding, then it's possible, in fact quite likely, That they won't be able to issue a notice to quit. They're more likely going to have to issue a notice to renew, and therefore they have to consider on what terms they are prepared to offer a new lease. What a reasonable rent would be with the evidence to back that up and bearing in mind at all times, that if the tenant's lease is protected by the landlord and tenant act, 1954, then the tenant is entitled to a new lease. on the same terms, which means the landlord doesn't get to call the shots in a substantial overhaul and modernization. But of course, the tenant's probably going to want some form of modernization. So then we get into the negotiation and trade off of clauses so that modernization can take place. Landlords come in all sizes. Some see their tenants as cash cows. Others see them as long term business partners. But bricks and mortar retail would be a very different landscape without them. Back in the good old days, many retailers owned their buildings. But that's now not so common, so retailers need landlords. They just need decent, respectable and competent ones, of which there are many. Good landlords attract good tenants. It's very harmonious. Bad landlords tend to incite unrest and maybe even nudge the tenants to unite against them. Remember, the Landlord and Tenant Act 1954 often means that the tenant isn't the underdog. Thank you for listening to That Retail Property Guy. I hope you enjoyed today's discussion and found it both entertaining and insightful. Don't forget to explore more episodes, and if you have ideas for future topics, feel free to share them below. If you enjoyed the show, please consider leaving a review. Be sure to like, share, and subscribe so you can never miss an episode. For more information, visit ThatRetailPropertyGuy. com. Thanks again for tuning in.