UKMarket: High street retailers and the property industry remain at loggerheads as they await a decision on whether to ban the practice of upward-only rent reviews, writes Henry Tricks

A long-running battle between retailers and the property industry is set to escalate as retail chains complain they are being squeezed by slower sales and rising rents.

Both sides are eagerly awaiting a British government decision on whether to ban the long-standing practice of upward-only rent reviews.

Retailers vigorously support a ban, while the property industry opposes any "government interference" in commercial leases.

The retail sector is also pressing for an end to property contracts restricting their ability to sublet commercial property that they are forced to vacate during hard times.

For retailers, the tussle is important because analysts estimate rents are their second highest cost after employees - accounting for about 10 percentage points of a 30 per cent average gross margin.

Although trading results for UK retailers over the Christmas period were mixed, many analysts believe the British consumer is retrenching, suggesting there may be years of dwindling profits ahead for supermarket chains and high street retailers. That would increase the pressure for more flexible leases, to prevent an inexorable rise in a significant component of their costs.

"Flexibility and choice in the commercial property market are essential for retailers in adapting quickly in an uncertain environment, and we can only hope the government recognises this," the British Retail Consortium, the industry body, said.

Retailers, meanwhile, have been among the best tenants for property companies during the consumer boom of the past five years.

Retail rental values have long outpaced inflation - though the property industry claims this is more because of planning constraints than upward-only rent reviews.

Property specialists, such as the consultants Donaldsons, believe the retail sector is not as hard-pressed as the BRC makes out. They also argue that a ban on upward-only rent reviews would not be the panacea retailers believe it would be, and might instead produce higher rents.

Nonetheless, the British Property Federation, which represents industry leaders such as British Land, Land Securities and institutional property investors, has held out an olive branch to retailers, saying it was prepared to be flexible on subletting clauses.

Liz Peace, the BPF's chief executive, says she wants to put an end to the "odd bit of grenade lobbing" between the two sides that has erupted in recent years.

Both retailers and the property industry were "all good capitalists in tooth and claw who don't want government regulation", she says.

The BRC, however, has dug in its heels, arguing that the property industry has failed to comply with voluntary codes in the past aimed at encouraging more flexible leases, and requires government intervention.

It also says the vast majority of leases remain upward-only, and it is not clear that the BPF has the ability to deliver easier subletting contracts from the industry at large.

"I'd be very sceptical about the BPF's ability to deliver (subletting concessions)," says Rachel Burns, assistant policy director at the BRC. "Retailers will need a lot of convincing."

The most vociferous retailer campaigning against the commercial property sector is John Clare, chief executive of Dixons.

In November, Mr Clare urged landlords to abide by a two-year-old property industry code of practice that seeks to make leases more flexible.

"Before we all find ourselves tied up with red tape, I urge you to abandon your inflexible approach and before it is too late, adopt the code," he said.

"If you do not, and quickly, the retail lobby will shift completely behind regulation as being the only way to change the current system. That is already beginning to happen."

Dixons closed more than 100 of its high street stores last year, and would consider moving the other 200 out-of-town if the upward-only rent review continued, he said.

This week, Tesco also ruled out setting up its potential non-food stores on the high street, saying rents were too high.

However, retail analysts believe the sector has an uphill struggle against the property industry because new retail space is so restricted and there will always be competitors willing to take selling space on whatever terms.

That makes it harder to present a united front.

"The thing is the football belongs to the property guys and getting them to loosen their grip on it has proved to be virtually impossible," says Richard Hyman, retail analyst at Verdict.

Financial Times