While high street collapses are often met with doom and gloom, Karen Mason looks at the bright side for landlords
When a major household name goes into administration, there is always much emphasis on the number of jobs that will be lost and how many stores will be closed.
For landlords there is the lost rents headline, and for the tenant there is the amount of debt it has found itself laden with, and invariably a pension fund deficit. BHS has all of these ingredients. It is a household name, 11,000 jobs are at stake, it has 164 stores in the UK and there are a lot of worried employees. This story is compounded by the collapse of Austin Reed just days later.
The landlord position
What is rarely discussed is that landlords will have, in all likelihood, been working with these tenants for many months, or even years, nursing them through the bad times, trying to help them stay afloat. But in respect of both BHS and Austin Reed, even before the administrations were announced, many savvy landlords will have already been working on plans to remove these ailing retailers and replace them with more vibrant, up-to-date brands. While it will be of no consolation to BHS and Austin Reed staff or debtors, this will be something of a silver lining – one that is rarely highlighted by the headline writers.
BHS opened its first store in 1928 in Brixton, while Austin Reed dates back to 1900 and boasted Winston Churchill as one of its most famous customers. But both operators have featured on most landlords’ “watch list” for many years, as tenants traded with some difficulties.
At any one time a landlord will have between four and five tenants on its watch list, either because rent payment has slowed down, or other signs suggest the tenant is struggling against major competitors. Regular analysts will have a much longer list, but it is those tenants with multiple units that most landlords will have their eyes on.
Comparing BHS and Woolworths
The administration of BHS is, understandably, being compared to the collapse of Woolworths: both had a large network of stores across the UK and a retail offer that many felt had run out of steam some time ago. BHS, like Woolworths, did not adapt quickly enough to keep up with the changes in the market and many of its stores look tired and dated. Even the flagship store on London’s Oxford Street has been struggling for many years.
In what now looks like a real “sign of the times” deal, I advised on an agreement for a lease two years ago that secured the exit of BHS from Fosse Park, Leicester, and its replacement by Primark. It was a big decision for the landlord, not easy to implement and requiring some investment, but as the brand new Primark store takes shape it looks like being the right one. This can definitely be seen as a landlord taking pre-emptive steps.
When Woolworths went into administration in 2008, it had only recently opened a big shopping centre anchor store in Loughborough. While this looked like a major reverse for the landlord, it was actually able to re-let the store to Tesco in a deal that improved the rental income, created more footfall and enabled a rebalancing of the fashion offering. The landlord was also lucky as the administrators made a decision early on that the unit was not one that they wanted to retain, as Woolworths had not traded there very long or built up much goodwill.
This does not always happen as in some cases the administrators will seek to retain the property and sell it and the business as a going concern. In such cases, the landlord may have a further period when it cannot forfeit the lease unless it can show that the forfeiture will not defeat the purpose of the administration, or that the landlord’s interest, when balanced against that of the tenant’s creditors, should be allowed to prevail (this is more likely if it can be shown that the administrator will not be able to secure a premium for the lease transfer).
Three years after Woolworths failed, 87% of its stores had been re-let or found alternative uses. That process was carried out while the recession was still in full spate, so it will be interesting to see how quickly the BHS stores find new occupiers. Woolworths had a lot more stores – 800 at the time of its administration – but BHS units will be coming onto the market at the same time as the Austin Reed stores. A further problem that might face the BHS administrators is that around 50 or more stores are located in not strong high streets, where landlords may struggle to re-let. This will again bring into focus how retail can reinvent itself in the face of these further failures – high street gurus may be back in fashion.
Emphasising the positives
Of course, administration constitutes a major challenge to employees, landlords and suppliers, but it can also bring regeneration to shopping pitches hindered by a failing brand. For employees, in the medium term it can also bring new, more meaningful jobs. Often employees will have gone through a long period of uncertainty, so having the challenge of working for a new company will often reinvigorate staff and provide a fresh challenge.
Landlords should now look at all their BHS and Austin Reed stores with positive eyes and consider how getting these units back may deliver long-term benefits. Landlords need to ensure they do not make the same mistakes as the retailers did, in not refreshing their offering and allowing their premises to fall behind rivals.
With storm clouds up ahead, landlords also have to look at more flexible lease arrangements, which enable them to be more nimble and stay ahead of competitors.
Karen Mason is a partner in the real estate and retail team at Boodle Hatfield
