Opinion: Holly Kiely

How the pandemic has driven change in the lease advisory world

The retail market was already in transition back in 2018-2019 with an increasing number of retailers starting to fall into insolvency arrangements. Affordability style agreements started becoming mainstream, with a particular focus on turnover leases.

The traditional zone A leasing approach certainly needs addressing. We are still too tied to an outdated system reliant on adjustments and percentages that are no longer relevant in the modern retail landscape. We have all been guilty of sticking a 5-10% adjustment on for ‘return frontage’, when the reality is that in the open market, that unit can achieve anything from 0%-100% more. Retail units are all unique and will perform differently from location to location. Although zone A analysis can still have a place, the market must take a more holistic approach.

Turnover leases are certainly becoming more prevalent and they are more challenging to analyse in a traditional lease renewal/rent review transaction. There is growing acceptance that what constitutes a market rent is not solely dictated by what rent ITZA was achieved on a similar unit down the road. You have to factor in affordability. Rates are cripplingly high and based on 2017 values. In addition to that, the cost of stock, staff and energy are on the increase. Rent is the only thing occupiers can control when bidding on a unit.

We are increasingly seeing a disparity across portfolios whereby higher ‘Zone A’ rates are being achieved on lease advisory matters than offers being received on vacant units. There needs to be a more joined up approach and that is exactly what we are doing at GCW. We don’t have rent review surveyors and agents sitting at opposite ends of the table. We all work together towards common goals to maximise assets and understand our clients’ needs and challenges.

If a dispute goes to court or PACT for 1954 Act renewals, or Independent Expert or Arbitration in the case of rent reviews, it is still the convention to focus on zone As for valuation. Yet it is important for Expert Witnesses to also have hands on experience of the agency world. The traditional approach is all well and good, but if increased costs mean that an occupier simply cannot afford the global rent, they will have to vacate, or enter some sort of insolvency process. Would an investor prefer their unit to be vacant and have to deal with the associated liabilities?

This also links in with the notorious ‘pandemic clause’. I’m sure many professionals dealing with renewals suffer from pandemic clause fatigue. It is extremely contentious. Occupiers see these clauses as a fair way to share the pain of reduced turnover. At the same time, many landlords flatly refuse to include them in a lease, especially if the occupier is categorised as an essential retailer and would never be obliged to close. Even judges can’t agree on whether they are awarded or not - it’s often a case of pot luck. The best we can hope for is that the days of lockdowns are over and we never have to deal with a pandemic clause again.