Inflexible retail leases can lead to a downfall

Imagine walking into a giant shoe store. Its walls are lined by an amazing assortment of goods in a wide variety of styles, sizes and colours. You say to the manager: "I'd like to buy a pair of shoes, please." "Great," he says. "You want shoes? We got shoes." He directs your attention to the magenta section, to the tan suede section and to the ankle-high boots. "I'm sorry," you say. "What I really wanted is a pair of shoes in the latest style and in black." "Oh, those," he says. "Well, if that's what you want, we only have them in size 11."

It may sound like a ridiculous scenario, but it is not far from that facing retailers seeking space in better shopping locations. The absolute price of new space may be negotiable, but when it comes to the size - or rather, the structure - of a lease, it is pretty much the wrong one for retailers.

Of course, retailers are not alone among those finding only the wrong size leases available. Office and industrial occupiers are similarly affected.

And in some places, the right-sized leases are available, particularly for office park and industrial space users, and for retailers seeking secondary and tertiary locations.

But the dramatic changes in shoppers' habits, coupled with the rising competition from overseas brands during the past two years, has forced mid-market UK retailers to rethink all their old sales strategies. And that requires far more flexibility about accommodation.

Anyone wishing to see how the shoes pinch need look no further than last week's trading statement from fashion retailer Arcadia. It has announced plans to close 55 shops in addition to the 400 announced earlier this year.

The shops to be closed, like the closures already announced, tie the tenants to institutional leases - ie: wrong-sized shoes - which characterise shopping centres and high streets. These leases, that run for as long as 25 years, have rents which can only rise and never fall, even when the location is no longer an attractive shopping destination.

Consider the innovative solution to leases announced last week by Abbey National, the UK bank. The terms of its deal, under which it sold its property portfolio to a joint venture, Mapeley Columbus, allow it to occupy its premises for as short or as long a period as necessary.

"The real reason for this deal is that it allows us to match our property portfolio to our business plans," says John Price, director of group property and survey at Abbey National. Although the group has had some success in negotiating leases shorter than 25 years, it has made little headway on upwards-only rent reviews, he says.

But why is there fundamentally only one style of lease on offer? Why do all landlords insist on the same terms? Is there a cartel?

Perhaps a comparable issue is the one that confronted Treasury ministers in the early 1990s when faced with rights offerings for companies, all of which had underwriting and sub-underwriting fees of 2 per cent and shares issued at discounts of 15 per cent to market price regardless of market conditions or the quality of the issuer.

There was never any suggestion of a lack of competition in investment banking - indeed, there may have even been too much - nor was there any suggestion that underwriters had somehow colluded to set prices.

It was simply that a practice had emerged over time and the entire community had a similarly vested interest in maintaining it, even when capital market conditions no longer required it. Ultimately, it took an inquiry from competition authorities to end the practice.

Nick Raynsford, the British planning minister, has told the property industry that if it doesn't come up with firm proposals for greater lease flexibility by the end of the year, the government will consider regulation.

But regulation of contracts is notoriously difficult, and it is hard even to imagine the language of a new law to ban upwards-only rent reviews.

Mark Bradshaw, who is responsible for property issues for the British Retail Consortium, says that the group has been reluctant to urge members to refuse to sign leases containing upwards-only rent reviews. "We might be accused of forming a cartel," he says. But a cartel, by definition, is an agreement among manufacturers, not among consumers. When consumers join together, it is called a boycott.

And the boycott is a time-honoured method of expressing customer dissatisfaction which, in instances too numerous to recount, has worked.