By Chris Igwe
Pretty much across the globe, as a direct result of the pandemic, it has been clear that lease contracts need a full overhaul. Landlord-tenant relationships have been stretched to breaking point in many countries. In the words of Winston Churchill, “Never let a good crisis go to waste!”
We do have a crisis. Retail real estate lease-contracts and the relationships between landlords and tenants have never been at such a low ebb and so adversarial. Some countries have weathered the storm better than others. However, we must not lose sight of this unique opportunity to ask ourselves, each country in its own context, what has worked, what will still work, and what does not work. At best, lease contracts are out of date, and at worst, unfair and unfavorable to fostering a healthy relationship between the tenants and landlord, in a world that has changed from the time when many of these leases first became law, more than 60 years ago for many countries.
So, the question is how can these leases possibly reflect retail in the modern world, or even, modern retail in a new world (with or without a pandemic), where consumer habits have changed? E-commerce is a case in point. For example, an often-mentioned issue is the shop-at-home-and-pick-up-in-store option. What is considered the point that triggers the sales? Does the shopping center landlord have a right to count those sales or not? Did the landlord contribute to the retailer’s investment in the digital platform which led directly to the creating the possibility for that sale to happen, albeit in the shopping center?
One national question would be, should the UK continue to have “upward only rent” clauses in leases? More broadly across Europe, should lease length terms of five or ten years or longer be fixed? We know that flexibility, and therefore, shorter leases are very much what tenants are looking for today. There is also a rising voice calling on adopting the outlet model of focusing on a turnover rent component, driven through sales increase. For me, the key factor in the outlet model’s success is the establishment of a relationship that is transparent and based on mutual trust, working towards a common objective, none of which truly exists in the full price sector.
A step in the right direction was seen from The German Council of Shopping Places (GCSP), where a Code of Conduct was used by landlords as the foundation to at least ride out the waves of the pandemic and manage in the short term, the landlord–tenant issues. Despite its challenges, it appears to have worked. In France however, the appointment of a mediator by the government was a disaster and never got off the ground, leaving each party to fend for themselves again. In France, the government went from offering no support in the first Covid lockdown period, to offering a tax credit if landlords agreed to cancel or discount the rent for the month of November 2020, during the second lockdown. Meanwhile, in China, shopping center owners offered rental holidays and discounts, up to a 50% reduction for retail in general and for leisure concepts, cinemas, and food & beverage, they continued to offer rental discounts up to 100%. With or without government, we need to, and can, fix our problems.
To close with Winston Churchill, he said, “Courage is what it takes to stand up and speak, it’s also what it takes to sit down and listen.” This is a time to sit down together, listen to each other, and build a future relationship that meets the needs of today, but is also the foundation for a better tomorrow.