Rent collection and rental negotiations

The impact of lockdown measures have been significant to retail and leisure operators across Europe, but the pain has equally been felt by landlords, who have had rent payments held back and are now seeing a significant number of tenants seeking to renegotiate their leases. While retailer trade will eventually recover as consumers return to shops and restaurants, albeit with a larger proportion of trade moving online, the consequences to landlord income and the subsequent reduced values of their assets is likely to be felt in the long term.

Retail rent collection levels were amongst the lowest across sectors in Europe during the lockdown period, in most cases, below 50% of normal levels. Many retailers have been unable or unwilling to pay rents, while their businesses were closed. A few landlords have avoided having to make significant concessions, or risk losing the tenant altogether.

In the UK, since March 2020 there have been 849 stores subject to a CVA (Compulsory Voluntary Arrangement) and 3,085 stores have fallen into administration, spread across 65 major UK brands and 33 holding companies. Overall 2020 results (January–August) suggest that insolvency activity was on par with 2019 so far; however, it is likely that there will be more brand fascia’s to face financial difficulties over the coming months.

Even following the reopening of outlets post-lockdown, retailers have been facing difficulties to meet their financial obligations requesting some form of rental relief from their landlords. On average retailers are typically seeking a 20–40% reduction in rent across their estates, or are seeking other rental adjustments such as rent-free periods, monthly payment of rent, turnover based rents only and shorter lease lengths. In return, some landlords are being compensated by an extension of the lease term.

In most markets that Savills tracks, these negotiations take place between landlords and tenants on a case-by-case basis, in some cases, there are some government support measures introduced to regulate rent collection and provide some relief, mainly to tenants.

FRANCE

• As early as March, some landlord federations took the initiative to suggest the monthly payment of commercial rents for the second quarter of the year (as opposed to quarterly payment) and to grant a rent-free period for the months of April and May. The government extended this initiative by organising some mediation between landlords and tenants which resulted in the signing of a charter in June 2020.

• This charter, which is not mandatory, includes the possibility for rent deferrals, including for the period following the lockdown, and rent-free periods. However, these incentives may come at a compensation for the landlord, such as an extension of the lease term, an early renewal of the existing lease or the signing of a new lease. The charter excludes rental charges from the scope of the agreement.

• This charter, therefore, changes certain aspects related to the typical commercial lease, which, anyway, had always left a lot of room for negotiation between the two parties. The lease length is for example relatively flexible, knowing that it should be at least for a period of nine years, whilst the typical shopping centre lease length is normally 10–12 years.

• The parties also freely set the rental level as well as the frequency of its review (annual or every three years) and its method of payment. The rent indexation is calculated according to the variation of the index chosen by the parties, namely either the Construction Cost Index (ICC) or the Commercial Rent Index (ILC), each of these indices being published by INSEE.

• It is difficult to quantify the financial cost of the negotiations undertaken within the framework of the charter: each agreement depends on the specifics of the situation between the landlord and the tenant. Overall the purpose is to secure and extend leases and to avoid legal proceedings.

ITALY

• Lockdown measures, which forced the closure of shops in malls for about two months, motivated the request from the tenants to the landlords for discounts on rents and exemptions from the payment of common charges. The landlords’ response was not homogeneous although there was a common request to continue to pay common charges in order to guarantee the shopping centres’ operations.

• The widespread landlords’ course of action has been to grant a rent discount for the lockdown period and to allow for deferrals in payments, switching to a monthly basis, or postponing payments to the end of the month – at least until the end of Q3 2020.

• Regarding anchor tenants, discount requests have been greater, and negotiations are still ongoing. Big players have asked for the transition to a rent structure exclusively on a turnover basis, for the 2020–2021 period, to then return to the 'usual' structure (MGR plus turnover rent).

• Contributions available at the governmental level for the retail sector have been in the form of tax credits for rental fees, usable in compensation or transferable to third parties. The beneficiaries had to have revenues not exceeding €5m in 2019 and to have recorded a reduction in monthly turnover (March, April or May 2020) of at least 50% compared to the same months of the previous year. The credit is equal to 60% of the monthly rent for property lease agreements and 30% of the rent in the case of business lease agreements, providing that the rents were paid.

• Businesses that did not reopen after the lockdown are limited in number and mainly regard the catering and services sectors. This is due to the need to reorganise spaces on the basis of the restrictive measures imposed.

POLAND

• The Polish government enforced the closure of shops in retail schemes of above 2,000 sq m and shopping centres, with the exception of super/hypermarkets and drugstores between mid-March and 4 May. Leisure activities, fitness centres/gyms and food courts, which are operating only for 'takeaway', reopened on 6 June.

• In the so-called 'anti-crisis shield' act (an act aiming to limit the effect of coronavirus on Polish economy) during the ban on trading, a tenant who could not trade due to the Covid-19 ban was not obliged to pay rent and other lease payments, and the landlord was not obliged to allow the tenant to use the premises. Also, other lease rights and obligations expired. The tenant had to submit to the landlord an unconditional and binding statement to the effect that they wish to extend the lease contract under the existing terms and conditions for the duration of the ban plus six months. The statement was to be submitted within three months of the date of the ban being lifted, thus the majority of lease agreements were renegotiated.

• It is still too early to predict the effect of the on future lease agreements, but stricter clauses of protection against future crisis situations, which safeguard both parties, are expected to be included.

GERMANY

• In April, the GCSP published a code of conduct with recommendations for landlords and tenants as a response to the Covid-19 crisis and the resulting problems due to the lockdown. These rules of conduct are not legally binding, but represent a voluntary commitment on the part of landlords and tenants.

• Suspensions of payments were largely requested by fashion stores, leisure and bars/restaurants since these industries suffered the heaviest loss in turnover. it is hard to generalise, as landlords response to tenants requests was not homogenous. For example, while one of the largest shopping centre owners is very solution-oriented and approaches the tenants, another has a rather hard position and is only oriented towards the legal requirements.

• There are some owners who act similarly tough and even draw the bank guarantee and ask the tenant to refill it – this is legally possible. Other owners are more flexible and offer e.g. two months’ rent-free against a two-year lease extension. In addition, there is also the division model that landlord and tenant share the loss of rent due to the lockdown.

• Rent reductions, in general, are difficult to achieve without extending the lease terms and, in the case of contracts with longer terms, only make strategic sense for large institutional investors / multiple owners.

• With new lettings we are observing an introduction of pandemic clauses in the contract. Also, rent reductions of owners up to 30% even in prime locations are being seen. Additionally, shorter lease terms are being observed, especially by big anchor tenants. However, this trend was already apparent before the crisis.

IRELAND

• Shopping centres were closed for approximately three months, with non-essential retailers on high streets and retail parks closed for three weeks less than this. Rent collection rates for Q2 and Q3 were approximately 40% for shopping centres, with retail parks at approximately 75%.

• Landlords and tenants are engaged in discussions on Covid rebates, the majority of which have yet to be finalised. Laws on rent reviews in Ireland state that the rent can go up or down, so the market operates on a two-tier system of legacy upward-only and newer up-down reviews.

• This influences the approach by both landlords and tenants in re-gears and provides an added dimension to negotiations. In addition, there are relatively low levels of sales-reporting by tenants with this likely to increase going forward.

• Turnover rent deals are very rare in the market. There are getting more airtime currently, but in reality, only a very small proportion of deals will eventually include them. They may be used as short-term measures to navigate any ‘post-Covid’ trading nervousness.

NETHERLANDS

• Suspensions of payments have been accommodated to help tenants with payment issues. The degree to which suspensions have been provided differs from location and industry and was done on a case-by-case basis. A remission of payments is mostly seen in leisure and bars/restaurants since they weren’t allowed to be open in the height of the Covid-19 crisis. Suspensions of payments were largely requested by fashion stores, since that industry suffers the heaviest loss in turnover.

• ‘Situation-related rent’, which would cover for the loss of turnover due to catastrophic events, has been suggested by a singular tenant. Turnover rents have been suggested as well. It is, however, too early to say if those lease types will become more common, since both tenants and owners are primarily focussed on temporary suspensions of rent payments.

SPAIN

• Based on shopping centres managed by Savills Aguirre Newman, from March to June, 67% of total invoicing rent has been collected.

• Shopping centre and retail outlet landlords have adopted various measures with which they propose to 'share' the negative effects of the standstill in consumption, by means of different formulas. In broad terms, the majority of property owners in Spain have negotiated a 100% discount on rents in April and May, and have negotiated an average discount of 30 to 40% during the month of June, July and August, in order to avoid vacancies. The exceptional cases are the French owners that are giving discounts of up to a maximum of two or three months.

• Tenants are asking to include contractual clauses that address measures to deal with a new pandemic, but in general, landlords are not accepting.

PORTUGAL

• As a protectionist measure, the Portuguese government determined that rents due, even during the period of lockdown, could be settled in 12 payments, after a three-month moratorium.

• More recently, the government decreed the suspension of the fixed rent component in turnover rents, until 31 March 2021. This measure, which has generated strong disagreement among landlords and investors, decrees that tenants will only pay the turnover rent, calculated on the volume of sales. It also includes the payment of all contractually agreed expenses, referring to common expenses and service charges. For large tenants, the weight of the fixed rent may mean 50% to 70% of the total rent value, whereas for small tenants the turnover rent has a more significant weight.

• According to the APCC, 99% of the associated shopping centres are in operation. Until 12 June, 87% of its landlords agreed to grant support in a total amount of €305m throughout 2020, in the form of discounts and rent arrears that allow the payment of these monthly payments to be deferred for 2021 and 2022.

• It will still be premature to be able to predict what effect this crisis will have on future lease agreements. Traditionally, the standard lease structure has a flexible character, depending directly on the relationship established between owner and tenant, and the size and importance of the brand for the retail scheme.

• For anchor stores, established contracts may have a duration of between 10 and 15 years, and for smaller stores, the duration of the contract may be six years, with a break clause at the third year. At this point, greater flexibility and openness for renegotiating contractual conditions seems to be of mutual interest to both owners and tenants.

SWEDEN

• There has been a continuity in rent collection over the past months. Some tenants have been offered monthly payments instead of quarterly. The state subsidies (up to 50% of the base rent) have been used by a lot of property owners. The subsidy was available for Q2 and extended to Q3 as well.

UK

• In the UK, £1.5bn of March rent payment remains unpaid in UK commercial property. Savills analysis shows that retail park rent collections were at 53% and 52% in June and March respectively, while shopping centres went from 45% in March to 39% in June.

• Landlords have been traditionally relying on fixed rents and upward-only rent reviews and they have been reluctant to commit to turnover leases. Turnover rents have been discussed in the industry for a number of years, since the industry has been experiencing challenges from the rise of e-commerce. Now the topic has come under the spotlight again.

• Landlords are now having to be more open to restructuring their leases, and a significant proportion of the lease discussions Savills are involved in includes negotiations around turnover based rents. However, the new agreements we have been seeing put in place over the last four months are not necessarily intended as a permanent fixture by landlords, but more of a way of navigating the current challenges in the sector; our recent survey shows that 74% of landlords anticipate current arrangements to only be in place for up to 24 months. The trend towards shorter lease lengths is also expected to accelerate. Lease lengths have reduced significantly in recent years, with a threefold increase in leases less than two years between 2018 and 2020. A further doubling of leases less than two years is expected by 2022, likely to account for 30% of deals signed in that period. In 2016, leases of 6–10 years accounted for around 55% of deals signed. This has since more than halved for new deals and is expected to reduce further in the next two years, when 90% of new leases are anticipated to be shorter than five years.

• It is worth highlighting that the vast majority of leases in the UK will remain untouched by the end of the crisis, and current projections suggest that at the end of 2020, turnover leases will still account for fewer than 10% of leases, and almost half will remain unchanged. Lease negotiations are usually where there is a lease event coming up, but the incidence of retailers coming cap in hand to landlords to renegotiate rents to a more affordable basis is increasing.

• As a consequence of low rent collection levels, 86% of landlords expect shopping centre rents to fall. Landlords anticipate rents to fall by an average of 22% on high street, 30% in shopping centres, 13% on retail parks and 34% on leisure schemes, following the Covid-19 pandemic.

LEASE LENGTHS UK

Lease lengths in the UK have reduced significantly in recent years, with a threefold increase in leases less than two years between 2018 and 2020. A further doubling of leases less than two years is expected by 2022, likely to account for 30% of deals signed in that period. In 2016 leases of 6–10 years accounted for around 55% of deals signed. This has since more than halved for new deals and is expected to reduce further in the next two years, when 90% of new leases are anticipated to be shorter than five years.

Without a lease expiry event on the horizon there is little impetus for landlords to consider re-gears or alternative leases, so much of the noise we are seeing at present is a trickle of deals being agreed in the context of the wider market, with most leases that have no events coming up will remain on traditional rents for the time being.

It is worth highlighting that the vast majority of leases will remain untouched by the end of the crisis and current projections suggest that at the end of 2020 turnover leases will still account for fewer than 10% of leases and almost half will remain unchanged. Lease negotiations are usually where there is lease event coming up, but the incidence of retailers coming cap in hand to landlords to renegotiate rents to a more affordable basis is increasing.

_{Read the articles within Spotlight: Impact of Covid-19 on European retail below.}