Tuesday, 23 December 2008

The fall and rise of prices (now to include rents?)

Here's one to give all the mutualists and land-taxers in the party something to chew over.

Upward-only rent assessments.

Until 1990 commercial leases for retail property usually tied tenants to 25-year contracts. A changed approach to regulation since then has been one of the motivating factors behind the recent retail boom as barriers to new business have been removed from the sector.

The big land-owning companies responded by bringing in inducements similar to the introductory offers store card operators used to lure customers into taking out contracts. And in just the same way as all credit contracts, introductory offers such as an initial 3-month rent-free period carried a trade-off. And there's the rub - they often also included quarterly payment in advance, longer leases and extortionate punative clauses for breaking the contract.

These moves were designed to ensure security of tenancy for the retail property developers and operators, without which the financing terms for the 42-acre Liverpool One or west London's mammoth new Westfield Centre simply would not have been met. Multitudinous regeneration projects have been and still are based upon associated retail plans as a driving component: we are and must be, it seems, just as much a nation of shoppers as a nation of shop-keepers.

Now this might have been hunky-dory had the economy continued it's vertiginous ascent, but as new figures released today show, we are on the edge of an official recession.

Arcadia Group boss, Sir Philip Green, is leading the charge against the "medeival" behaviour of inflexible contracts, describing it as "wrong in principle", while the British Retail Consortium is backing moves to renegotiate, describing the contracts as an "ancient practice" not given to the digital age and harmful to both retailers and consumers.

Arcadia's House of Fraser (35% owned by the troubled Icelandic retailer Baugur) has now done a deal with landlord Hammerson (which may be a precursor to a buy-out to prevent a rival take-over). This matches an agreement secured by other retailers earlier this year and follows a similar deal reached earlier this month by smaller retailers with three or fewer shops and less than £50,000 annual rents.

But quarterly advance payments are only the start. Professor Neil Crosby has long campaigned against upward-only rent reviews , which often hit independent retailers harder due to a lack of experience or good advice prior to negotiations. As many as 95% of such contracts were tied into upward-only assessments, but while offending clauses have been easier to remove during lease renewal negotiations resistance to negotiate resulting from the economic downturn may now be causing additional damage to the economy as trade volumes reduce and overextended companies get further into difficulty.

Some landlords have resisted abolishing this sort of contract arguing many small retail businesses would not be able to get off the ground without the low initial rents such deals enable, but this presupposed any economic downturn of the sort we a seeing currently - the business challenge is now no longer encouraging start-up, but ensuring survival - it is important to prevent the situation from developing that just when retailers are suffering from worsening conditions, they are hit with the second blow of structural inflexibility.

This is one campaign I think LibDems should get behind - we would be seen as the consumers' friend as well as sympathetic to some large and influential employers.

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