With rental payments due on 24 June, Peter Craske, Senior Director, Project Management at CBRE Bristol, explores the challenges facing retailers and their landlords …

With non-essential stores now allowed to reopen, retailers will be hoping for a boost in sales to account for three months of enforced closure. But with many behind on their rental payments – and with government backing to defer those payments – their landlords will be bracing themselves for another three months with either little or no income from rent.

After countless negative headlines in recent years about the retail sector, the months ahead are going to be more challenging than ever for retailers and their landlords as stores attempt to recoup lost sales while accommodating big changes to the shopping experience.

A key date for retail

Retailers typically pay rent on their properties on a quarterly basis, spreading their rental costs across the year on the four ‘quarter days’.

The first quarterly rent day of 2020 fell on 25 March, just as the country entered lockdown. In a move to support retailers struggling to pay their rents in the face of forced store closures, the government prohibited landlords from issuing statutory demands on rental payments. It also introduced a three-month ban on evictions for non-payment, which has now been extended until the end of September.

Payments for the second quarter of 2020 are due on 24 June, less than 10 days after non-essential stores were officially allowed to open their doors to shoppers for the first time in 12 weeks. With less than two weeks of trading – and under very different conditions to the pre-lockdown shopping experience – many retailers will struggle to make their rental payments for a second quarter running.

What does this mean for landlords that are potentially left without this income for another three months?

A new partnership

The government’s code of practice says that if retailers can afford to pay rent they should, but if not, there should be a meaningful conversation with landlords about what can realistically be paid.

Just like their tenants, landlords have bills to pay. While service charges may have reduced during the lockdown when non-essential work wasn’t carried out, those will be increasing over the coming months due to the work needed to accommodate social distancing measures.

It may sound obvious, but it’s in the best interests of landlords for retail businesses to survive and, by working together, there’s hope that agreements can be reached that are both achievable for retailers and allow landlords to continue to operate.

For example, a retailer may be able to agree to pay 50% of their rent now, with the rest to follow next year. On the next quarter date in September, this could possibly rise to 75%, in recognition that, while all shops have been allowed to trade, their sales were unlikely to have reached pre-Covid levels.

Essentially, what we’re likely to see are short-term agreements that will help to support retailers through this challenging time.

Looking ahead

At the moment, we’re perhaps another quarter away from landlords and retailers being able to have a meaningful discussion about how rentals might work moving forward. Retailers know how much the lockdown impacted their business over the second quarter of 2020, but the next three months are difficult to predict. We need to experience a quarter under the new trading conditions before we can get any idea of just how much this new way of operating is likely to impact on stores.

In the future, turnover rents could become the prevailing structure in retail lease agreements. Some retailers will prefer to pay their rent monthly rather than quarterly and we’re likely to see increased flexibility built into leases.

The value of retail property

Given the current period of uncertainty for both landlords and retailers, the way retail property is valued has also been impacted.

Ian Banks, a Director within our Valuations team, explains:

“When it comes to valuing retail properties we would usually analyse typical rental rates achieved on the same street or within the same shopping centre etc. Moving forward, we expect to see occupiers look at a combination of rents, rates and service charges together, rather than focussing on the rental rate in isolation. It’s all about assessing affordability.”

The continued disruption caused by the lockdown and prolonged social distancing measures will further accentuate the already existing pressure on bricks-and-mortar retail caused by the rapid growth of e-commerce.

“Covid-19 is undoubtedly accelerating structural retail change and it’s inevitable that we will see more store closures on the high street across the country,”

adds Chris Thomas, Senior Director on our Retail team.

“That said, retailers operating on out-of-town parks are better placed to implement social distancing requirements for shoppers so we would expect this sector to be more resilient during these unprecedented times.”

The longer-term impact on the retail sector remains to be seen, but there are likely to be significant consequences for the retail property market. The positive news is that landlords are getting closer to tenants through this challenging time and it’s in everyone’s interest to keep this spirit of collaboration going.