7 January 2019

Saving UK High Streets: What Would Mike Do?

A difficult 2018 for the retail sector was capped off by the administration of HMV for the second time in 5 years after disappointing Christmas sales.  This news echoed the experience of many of the household names on our nation’s high streets in a year which has seen Moss Bros, Bonmarche and Debenhams issue profit warnings and numerous retailers turn to CVAs to restructure their assets and shed under-performing stores from their balance sheets.

The Government appears to be acutely aware of the difficulties in the retail sector at present and invited heads from Marks & Spencer, New Look, Lakeland, Nando’s and Sports Direct to share their views before the Housing, Communities and Local Government Committee on 3 December 2018.

As is often the case, the thoughts of Mike Ashley (who acquired 59 House of Fraser and Evans Cycles stores earlier in 2018) garnered the most column inches - in particular his views on the retail measures announced in Phillip Hammond’s Autumn 2018 Budget, which included:

  • a new 2% digital services tax from 2020 on large digital companies such as social media platforms, internet marketplaces and search engines;
  • a business rates cut for firms with a rateable value of £51,000 or less;
  • a new £675m ‘Future High Streets Fund’ (designed to assist local areas with the development and implementation of long term infrastructure strategies and projects aimed at creating housing and workspace adjacent to existing high streets); and
  • the launch of a consultation on changes to the planning legislation which deals with permitted development rights for retail uses.

These measures were, however, dismissed as the ‘works of a child’ by Ashley, who also faced questions from MPs relating to the failure to save a number of House of Fraser stores from closure following the takeover by Sports Direct in August 2018.

Ashley, whose Sports Direct business records around £400m of online sales each year, is firmly of the view that the ‘internet is killing the high street’ and offered a number of other suggestions to help bricks and mortar retailers compete with the online market:

  1. Retailers who make more than 20% of their sales online (which would include Sports Direct) should be subject to an ‘online retail tax’ of 20% on online sales, with a view to encouraging retailers to invest in their high street portfolio;
  2. The proceeds of this online retail tax should be used to allow local authorities to make cuts to business rates. Such relief should, however, only be made available on a ‘pound for pound’ basis in exchange for commitments from retailers to invest and refurbish their high street stores; and
  3. Further investment in free parking and park-and-ride schemes serving regional high streets.

The Role of Landlords

In conjunction with these legislative changes, Ashley has also called for landlords to share some of the burden in order to save the UK’s high streets, which he colourfully described to MPs as being “in the bottom of the swimming pool, dead”.

Ashley has been vocal in his criticism of landlords who have refused to agree rent reductions on some of House of Fraser’s stores including shopping centre chain Intu, in which a number of stores have closed after deals to pay little or no rent were rejected.  Elsewhere, some local authorities, such as those in Camberley and Darlington, have agreed significant concessions to save House of Fraser stores and a number of others have worked with Ashley towards converting upper floors of these stores into residential accommodation so as to make these sites more viable.

The solutions reached by these local authorities echo the view that retail landlords now need to offer a broader range of uses and more ‘consumer experiences’ to end-users rather than a purely retail product.  The proliferation of ‘meanwhile uses’ of former retail space, such as escape rooms, crazy golf courses and secret cinemas has shown how landlords can re-generate a ‘buzz’ in their asset by embracing less traditional occupiers of former retail space.

Upwards Only Rent Reviews

Next into Mike Ashley’s crosshairs was the concept of ‘upward only rent reviews’ in leases, which are responsible, in Ashley’s view, for causing a ‘downward death spiral’ in retail tenant leases.

These rent reviews - which guarantee a minimum rental level to landlords irrespective of market conditions - were the subject of a statutory ban in Ireland in 2008 in response to the financial crisis with a view to helping cash strapped tenants. The ban applied to upwards only, open market rent reviews in all new leases with effect from 28 February 2010.

A similar ban had been consulted on by the Government in England and Wales in the early 1990s, but the conclusion was reached that the threat to capital investment values and property lending industries was too great to justify imposing on the freedom of landlords and tenants to agree lease terms without state intervention. An industry wide study in 2007 by LSH identified the same threat to capital investment values and it would seem unlikely that any different conclusion would be reached if Ashley’s calls for a fresh review were to be heeded now.

Instead we may see a move towards the approach taken by JD Wetherspoon’s owner Tim Martin, who has generally avoided agreeing to such provisions in his vast pub portfolio.  Martin has instead pushed landlords to agree arrangements with fixed uplifts, RPI linked reviews and tenant break options as a means of ‘future proofing’ his investments.

This approach has worked fairly well for Wetherspoons, but the events of the last 12 months, which have affected some of the most recognisable brands on our high streets, have further highlighted the structural problems deeply rooted in the high street retail sector.  Pragmatism and plenty of creativity will be required from both the state and private sector landlords if a solution is to be found which can breathe life back into an asset class, which otherwise looks set for another difficult year in 2019.

Andrew is an associate in our Commercial Real Estate team.

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