Retailers seek relief from pressure of lockdown rent bills
Many landlords are striking rent agreements with retailers, but institutions such as pension funds are seen as deal laggards
The Omni shopping centre in Santry, Dublin. Some landlords are doing rent deals with retail tenants, but the Omni has stood out in the sector for the intransigence of its approach. Photograph: Tom Honan
In recent years Palestinian businessman Mohamed Alkurd has steadily built up the L’Ombré group, a chain of nine upscale hair and beauty salons dotted around Dublin. But like many other businesses in its sector, it has been hit hard by Covid-19 restrictions.
L’Ombré’s salons are closed for the foreseeable future. Its 186 employees must wait until the virus abates and the Government gives permission for non-essential retail to reopen before they can go back to work. These are difficult and stressful times for all concerned.
Alkurd’s business has no income. He has agreed rent deals with several of his landlords to help stem the losses caused by the pandemic. Some gave him up to 60 per cent off for closure periods. One particular landlord even approached Alkurd, unprompted, and told him he need not pay any rent at all while his outlet is closed.
But another landlord, the Omni Park shopping centre in Santry in north Dublin, has held out. Alkurd describes his experience trying to negotiate a rent deal with the Omni as “horrific”.
The shopping centre was built in 1991. It is owned by MKN Investments, which is controlled by the family of successful housebuilder and Omni co-developer Sean McKeon, and Ambasaid, an entity owned by wealthy private clients of Goodbody Stockbrokers.
L’Ombré opened its outlet there in 2019, and did not even get a full year’s trading in before the pandemic arrived, sweeping away its immediate future.
Some landlords are doing rent deals with retail tenants, but the Omni has stood out in the sector for the intransigence of its approach. Last April it was reported that the company had written to several tenants denying them rent breaks beyond allowing them to pay rent monthly, instead of quarterly, but in advance: “No other concessions will be granted and legal proceedings will commence where tenants fail to pay their rent and service charges.”
Industry lobby group Retail Excellence described Omni’s approach at the time as “appalling”, but the landlord has since begun to follow through on its threat.
Some smaller tenants were warned they would be expected to make up 2020’s rent arrears by paying 1.5 times their monthly rent in 2021.
The last Alkurd heard from his landlord at the Omni was a letter sent by its solicitors late last year.
“They told me if I didn’t pay all my rent they would apply to wind up my business in 45 days,” he says. “How is this fair? I have been successful in business. I have a good name around Dublin. But I cannot pay the rent. I don’t have the income to do it. What am I to do?”
MKN Investments made no response to requests for comment.
Non-essential retailers, such as fashion stores, have been shut for more than half of the pandemic. With the new more-transmissible UK variant of the virus still rampant, there is no expectation that they will be allowed to reopen this side of Easter in April. Representatives of the sector believe that, as a consequence of the rolling closures, there is a reckoning coming on rent arrears. Many retailers argue: how are they supposed to raise cash to pay rents on stores that were forcibly closed by the State?
By last September two-thirds of Irish retailers surveyed by Retail Excellence were still carrying arrears from the first lockdown last spring. This month its research suggested one in five is still carrying arrears of between 40 and 60 per cent of their total for 2020. One in 12 shops still owes more than 80 per cent of last year’s rent.
All the while the legal cases keep coming all across the retail sector.
Bookseller Eason has been hit with several High Court suits over rent disputes. Gap is being sued by a landlord owned by Deutsche investors who bought its Opera Lane premises in Cork, the largest Gap in the country.
New Look, Schuh, BB’s Coffee & Muffins all have legal cases open against them by certain landlords. An Aviva fund is suing fashion designer David Reiss, who operates a store on St Stephen’s Green in Dublin.
Landlords, of course, have their own problems. They have bills to pay too, and some retail landlords are also SMEs. Many landlords have come to the table to do deals, such as Hammerson, the co-owner of Dundrum Town Centre, the Swords Pavillion and the Ilac Centre, which has sought 50 per cent from tenants during closure periods. It recently told investors it has collected only 31 per cent of its rent roll in Ireland for this quarter.
Many smaller landlords, meanwhile, are trying to close finance deals with banks, whose blanket loan moratoriums ran out last September. Everything is on a case-by-case basis now.
Duncan Graham, the chief executive of Retail Excellence, says the Government recently asked it for further evidence of the scale of the problem. Last week it provided figures on rent arrears to Damien English, the Minister of State who has responsibility for the retail sector. The Government published a voluntary code of practice in September for engagement between landlords and retail tenants.
“We need more than a code,” says Graham. “We need a fully independent arbitration body with the power to effect lease changes in the short to medium term. Unprecedented times call for unprecedented action.”
Industry sources say requiring landlords to submit to an independent arbitrator may prove legally difficult as it would require the State to retrospectively interfere in the terms of commercial leases, which are legal contracts.
Yet Graham is undaunted. He says many retailers have received “threatening letters” from landlords, and he expects this trend to “ramp up” as soon as non-essential retailers are allowed to reopen, as expected, sometime in coming months: “By the time second quarter rents are due, we need to have a solution up and running.”
In the meantime, retailers and landlords are getting on with it as best they can.
Carraig Donn, a luxury goods retailer with headquarters in Westport, Co Mayo, has 42 retail outlets in the State. By the end of March it will have been closed for 32 of the preceding 52 weeks. Of its 500 staff, only between 60 and 70 are currently working, in administration and online.
“You step back and you think ‘wow’,” says senior executive Michael Callaghan, its head of commercial finance. “Online sales grew from 10 per cent of our business to 25 per cent in 2020. But it can never make up for what you’ve lost.”
Callaghan says Carraig Donn, which is owned by siblings of the Hughes family that owns Portwest, was “proactive” in its rent discussions with landlords during the first lockdown last year. For example, if a landlord agreed to give the business the second-quarter rent free, Carraig Donn might agree to extend the lease.
“The good landlords came with a ‘shared pain’ approach, maybe a fifty-fifty deal on the rent. But there are still some landlords burying their heads in the sand and saying ‘I have a lease’. As a consequence of that, in future they may end up having to engage on turnover-based rents.”
Callaghan says he originally expected small, individual landlords to be the most difficult to deal with. But it turns out that large institutional landlords, especially international pension funds, are the ones that, as he sees it, are “afraid to grasp reality”. Carraig Donn has now agreed rent deals covering last year’s lockdowns with all but five of its landlords.
“There seems to be a fear among some big pension fund landlords of going to their parent in Europe or wherever to get us a deal. But this isn’t just an Irish problem, it is all over the continent.”
Early in the first lockdown Retail Excellence proposed a scheme where the State would pay 60 per cent of rents for closure periods, the landlord would take a 20 per cent hit, and retailers would pay the other 20 per cent. Callaghan thinks it would be difficult to get the Government to pay for such a scheme as it can’t be seen to be financially supporting the property industry (“a throwback to the last crisis”).
“I just don’t think the Government is in a position to pay a percentage of rent. But it does have a role to play. We don’t need arbitration for everybody. But if a deal can’t be done, we do need some way of getting people together into a room with an authority that has the power to make a call on things.”
Field’s jewellers, which has 14 outlets, is among the retailers to have been hit with a lawsuit from Paddy McKillen’s Jervis Street shopping centre in Dublin. Noel Coyle, the group’s chief executive, will not discuss its legal cases or negotiations with named landlords. But he says it too has had a “mixed response” to its entreaties to landlords for rent deals to cover closure periods.
“I don’t think anyone has paid any attention at all to the voluntary code that was brought in in September,” he says. “I’m also not sure that an arbitration scheme is deliverable. By the time it was set up, it would be too late to help.”
Coyle argues that retail “will still be challenged” even after reopening. Many Irish retailers will have noted this month that a new Irish logistics hub is being built for Amazon, which will speed up deliveries for Irish customers and eat into the local retail market.
“I believe the main focus of the Government now has to be on maintaining all the other ongoing supports that are in place for businesses – wage subsidies, rate holidays and so on – and not just focus on the rent,” says Coyle.
Landlords’ agents, such as property adviser Savills, argue that the image of big bad landlords beating up small retail tenants does not always accord with the truth.
Kevin Sweeney, Savills director of retail, insists that “a large majority of landlords want to come to a fair arrangement with tenants” over rent breaks for forced closure periods.
“The core factor is trust. That’s what it all boils down to. A tenant who is honest and open and prepared to open their books to a landlord will make better progress.
“Every dog on the street knows retailers have suffered. But when it comes to the big pension funds, for example, the people who work in those want to do the best they can. They’ll have assets in many countries. But when the local manager here goes to the international parent looking for a pot of money to give rent breaks to tenants, the parent often will point out that some other European governments are making direct contributions to retail rents, but the Irish Government isn’t doing that.”
Sweeney concedes that not all landlords are playing ball in a way that retailers would like.
“Some are opportunistic. But you’re getting some opportunism on both sides,” he says, referring to some retail chain tenants that may refuse to pay rent even if they can afford to, and which are also reticent about opening up their books. “But I don’t think the opportunists on either side are representative of the market.”
Hovering in the background of the retail rents debate, as lender to both shops and landlords, are the banks.
Brian Hayes, chief executive of the Banking & Payments Federation Ireland, the sector’s main lobby group, says banks will back loan repayment breaks for smaller landlords on a “case-by-case” basis, this indirectly facilitating downstream rent breaks for shops.
“The banks know you can’t get blood from a stone,” he says, insisting they want to be “part of the solution”.
But he also sounds a warning.
“There will have to be significant restructuring in many businesses when this crisis is over. But then the question arises of which businesses are going to be viable in the long run? Banks will want to do a deeper dive to assess this.”
With the pandemic-related bonanza in online retailing and the expansion in Ireland of Amazon, structural changes in how consumers choose to buy goods may bring more pressure on traditional shops in future.