Business battles high street rents

As consumer spending continues to fall, retailers all over the country are struggling to pay rents that are a legacy of boomtime. Thousands of tenants need a constructive response from both legislators and landlords, writes LAURA SLATTERY

IN YEARS to come, the Carluccio’s standoff that played out on the corner of Dublin’s Dawson and Duke streets earlier this month may well be regarded as a defining moment in the commercial struggle between landlord and tenant.

To recap: on February 3rd, the Irish franchise of the Italian cafe/restaurant chain kept its shutters down, with its operators saying it would not reopen unless it could agree a rent reduction with its landlord, a consortium of investors (including former AIB chairman Dermot Gleeson) that goes under the name the Duke Co-Ownership Partnership.

Some 60 jobs seemed destined to evaporate.

It was understood that Carluccio’s, which opened in March 2008, had implemented what it called “a pause in rental payments” in early 2009.

The company said that it had been “very successful” in reducing operating costs such as labour so that they were “aligned with current levels of trade”, but to date it had been “unable to reach an agreement with rent”, an annual sum of €680,000.

Fast forward just two days later, and it appeared that after a “very constructive engagement” between the two sides, Carluccio’s had secured a triumphant rent reduction and would reopen.

The case has been watched closely by members of groups such as the Grafton Street Tenants Association, who have mounted a lengthy campaign to highlight the punitive bubble-era rents they are forced to pay landlords – many of whom, unlike the investors in Carluccio’s premises, are faceless overseas financial institutions.

Both the association and the national body for employers in the retail sector, the Ibec-affiliated Retail Ireland, want the Government to step in and fix what they see as anomalies in the market. Rents, the biggest bugbear among a raft of issues for retailers, are not sustainable at their current levels: more Carluccio’s-style “pauses” in payments, followed by outright defaults and eventual receiverships seem inevitable unless landlords capitulate or the Government intervenes.

For John Corcoran, spokesman for the Grafton Street Tenants Association and owner of the Korky’s shoe chain, the situation is as clear as it is grim: “If landlords continue to close down trading companies, there’ll be no jobs, there’ll be no rates for the local council and eventually there will be no country . . . it will be a wasteland,” he says.

There are precedents: both the Irish fashion chain Sasha and O’Brien’s Irish Sandwich Bars cited impossible rents as the trigger for insolvency. This week, Jackie Skelly, the chain of fitness clubs currently in examinership, blamed upward-only rent reviews for exacerbating its problems. Meanwhile, a ruling by the Supreme Court in December that Linen Supply of Ireland could repudiate – that is, get out of – leases in order to facilitate its rescue could be significant for future insolvencies both in and beyond the retail sector.

The clarification was judged to be of little comfort to landlords. But Linen Supply of Ireland emerged from examinership last week, preventing the loss of 350 jobs.

The boss of Korky’s says he opens up his Grafton Street outlet only to lose €1,000 every day. His rent of €445,000 a year, having quadrupled under his lease over the past decade, accounts for more than 40 per cent of his turnover. His landlord, Canada Life Assurance Company, won’t budge and has instead begun legal action for unpaid rent.

“Psychologically, it is very damaging having to open a shop just to lose money. Then there’s the opportunity cost. We’re spending a lot of time fighting landlords, time that should be spent developing the business,” says Corcoran.

The size of the rent reduction won by Carluccio’s was not disclosed but, as far as Grafton Street is concerned, he believes most shops are “over-rented by 100 per cent” – they are paying twice what the market rent should be.

Korky’s trading company, Simon Hart Ltd, embarked on a protest strategy, withholding 25 per cent of its rent from the landlord. Arrears of €111,250 have been whittled down to about €56,000, according to the latest High Court summons and the case is due to be heard on March 10th.

Comparing Dublin with other cities also gives an indication of where rents should be – or, more precisely, where they shouldn’t be. “We shouldn’t have higher rents than London or Tokyo. It’s the epitome of how crazy things are in this country,” Corcoran adds.

Responding to desperate pleas to inject some legislative sanity into the situation, Minister for Justice Dermot Ahern last year agreed to ban what is widely regarded to be one of, but not the only, source of the crisis: upward-only rent reviews on leases.

The ban comes into operation at the end of this month. But it will only apply to new leases, meaning many retailers are locked into long-term upward-only leases.

The two-tier market means they are unlikely to find a tenant who will take on the remainder of an upward-only lease: Corcoran has been offering a reverse premium – effectively paying someone to take on the lease – of €300,000 on his Grafton Street outlet, but there have been no takers.

Further modes of Government intervention on retailers’ wish lists now include temporary relief for businesses stuck in the old-generation of upward-only leases, possibly involving State compensation to the landlord; the introduction of a mechanism that would allow traders to convert their upward-only leases to market rent leases, and incentives to encourage rent agreements where payments are based on a percentage of the business’s turnover.

Popular in Europe, turnover rents have already spread to Ireland via large chains such as Zara and HM, which have had the clout simply to demand them.

Unlike the 40 per cent of turnover paid by Korky’s in its disputed rent, the percentages paid tend to be much lower – in the region of 8-12 per cent.

Corcoran believes turnover rents bring a long-term mutuality to market, putting both landlords and tenants on the same side. Otherwise, he says, it’s “just warfare, trench warfare” between the parties.

The retailers’ plight has found some sympathisers in political circles, with Fianna Fáil TD Chris Andrews the latest to raise it.

“These are extraordinary times and landlords have to be willing to facilitate viable businesses. If they are not, the Government must intervene. Rents kept artificially high by institutional investors in particular, to protect investments, will ensure that Ireland’s return to competitiveness is protracted and disjointed,” Andrews says.

“The drastic change in Ireland’s economy in the past 18 months means that old leases drawn up in boom years are no longer realistic.”

But the drastic change that he speaks of has brought other consequences. After a collapse of more than 7 per cent in consumer spending in 2009, and with further declines pencilled in for 2010, domestic consumption has more or less been written off as an engine of economic growth: shopping was for boom times.

A correction is now taking place in which the fortunes of exporting companies are rising up the Government’s list of priorities and businesses that cater only for the cash-strapped Irish consumer are falling down the pecking order.

Retailers have found allies in the High Court, however.

“In Ireland, fair rents have been a public policy objective since the days of the Land League,” senior counsel Edmund Holohan noted last month in the case of Carluccio’s neighbour on Dawson Street, the Apollo Gallery. The gallery’s owners have asked the courts to clarify the legality of upward-only clauses before their landlords appoint an arbitrator to conduct a rent review. Such arbitrations have, only recently, resulted in an 18 per cent rent rise for a Grafton Street newsagent.

There are two types of upward-only clauses, Holohan wrote in an expression of views on the law: threshold clauses, whereby the rent may fluctuate according to changes in market value, but never fall below the rent agreed at the outset (€100,000 in the Korky’s example) and ratchet clauses, which state that the rent must never fall below the rent that applies at the time of the review.

Holohan noted that during the first 100 days of Franklin D Roosevelt’s presidency in the US, measures to combat the Great Depression included the invalidating of clauses in private contracts concerning payment in gold – “clauses which in deflationary times had much the same real effect as the ratchet type commercial rent review clause”.

Holohan’s conclusion was that rent reviews must take the recession’s devastating impact on tenants’ revenues into account.

When it comes to wealth destruction, however, recession is not choosy, and retailers are not alone in their woes. In its victory statement, Carluccio’s adopted a more conciliatory tone, praising its landlord’s “constructive response” and saying it “recognises that current market conditions are extremely difficult for landlords, who have financial obligations to banks and tenants alike”.

Thousands of tenants are still waiting for their constructive response.