Upward-only rents receive an unfavourable review
Although the creation of upward-only rent review leases was banned in 2010, retailers who had the misfortune to sign on the dotted line just before this cut-off point, could still face almost three decades of rent woes. Debenhams’ recent examinership is a case in point, writes Dan White
26 July 2016 | 0
Debenhams’ decision to put its Irish subsidiary into examinership makes it clear that a situation where legacy upward-only rent review leases could survive for up to another 29 years is completely unsustainable.
On 12 May an interim examiner was appointed to Debenhams Retail (Ireland) by the High Court. The appointment of an examiner to Debenhams was confirmed on 25 May. Debenhams now has a period of up to 100 days to reach an agreement with its creditors to restructure its debts.
The appointment of an examiner has raised fears about the future of jobs of the 1,400 people employed directly by Debenhams along with those of 500 concession and 300 cosmetics staff.
Latest in a long line
Debenhams is merely the latest in a long line of retailers operating in the Irish market who have been forced to either seek protection from their creditors or who have disappeared altogether. DIY chain Atlantic Homecare went into examinership in 2012, followed by competitors B&Q and Homebase the following year. Iconic Dublin retailer Clerys was liquidated in 2015 while Superquinn was subsumed into SuperValu following the appointment of a receiver in 2011.
As was the case in the Atlantic, Homebase and B&Q examinerships, Debenhams has sought the protection of the High Court in order to renegotiate upward-only rent review leases. While the creation of new upward-only rent review leases was banned in 2010, retail tenants who unwisely entered into such leases during the Celtic Tiger era could, theoretically at least, find themselves trapped in such leases for decades to come.
On the hook
A retailer who agreed to a 35-year upward-only rent review lease just before the creation of such leases was banned in 2010 would be on the hook until 2045, which is 29 years from now. In practice there were very few, if any, new upward-only rent review leases agreed after 2007, which means that the last such leases will probably expire in 2042, “only” 26 years from now.
According to figures supplied to the High Court by Debenhams, the retailer has lost €22.6m in Ireland over the past three years. It had only survived due to support from its parent company, to whom it owed €46m. When the UK parent withdrew its support, the appointment of an examiner became inevitable.
Which of course begs the question: with retailing finally recovering – the value of non-motor retail sales was up 1.3% in the 12 months to April – how has Debenhams continued to be so heavily loss-making?
Potential legal battle
The company is blaming what it describes as “onerous”, i.e. upward-only rent review, leases. Debenhams’ annual Irish rent bill is €25m. However, unlike previous retail examinerships, where the parent company had not guaranteed the leases of its Irish subsidiary, there are understood to be a number of parent company guarantees at Debenhams, something that could lead to the mother and father of all legal battles between the UK parent company and the landlords of some of its Irish stores.
Indeed there are signs that this battle may have already begun. The Roche family, which sold its Roches Stores retail chain to Debenhams for €29m in 2006 and is still landlord of two of Debenhams’ Irish stores, has filed papers in the High Court alleging that the examinership application was “tainted” and based on an “incomplete and inaccurate” picture of Debenhams’ Irish subsidiary. Court documents also revealed that Debenhams’ UK parent took a €55m dividend from its Irish subsidiary in 2013.
Upward-only reviews under microscope
Debenhams has responded by pointing out that the Roche family has received over €100m in rent on the two properties, Henry Street in Dublin and St Patrick’s Street in Cork, since 2006. Debenhams is also one of the anchor tenants at the Blanchardstown Centre, which has recently been put on the market by its owner Green Property with a reputed €1bn-plus price tag. Don’t be surprised if Green has something to say about all of this before the examinership process draws to a close.
If the current legal skirmishing does erupt into a full-scale court battle, the arbitration system that decided on rent increases under upward-only reviews will almost certainly come under the microscope. Between 2000 and 2007, commercial rents, virtually all of which were then subject to upward-only reviews, increased by a massive 240% while the cumulative increase in the consumer price index over the same period was a mere 30%.
Debenhams will also point to a 2012 High Court decision which ruled that where the guarantor (in this case Debenhams’ UK parent) agrees to enter a new lease then the rent can be adjusted up or down.
Utterly unsustainable situation
However, even before any of this happens, Debenhams’ examinership illustrates yet again the impossibility of maintaining existing upward-only rent review leases well into the second quarter of the century. How can retailers operating with legacy upward-only rent review leases be expected to compete against new retailers with either new post-2010 leases or those who have used the examinership process to walk away from upward-only leases?
The answer of course is that they can’t. Whatever the legal rights and wrongs of Debenhams’ examinership, it will almost certainly tilt the playing field even further against those retailers operating under pre-2010 leases. At a time when the rise and rise of the internet giants such as Amazon continues uninterrupted – Debenhams has just poached Sergio Bucher from Amazon as its new chief executive – the notion that traditional retailers trapped in upward-only rent review leases can survive strikes me as far-fetched.
At the very least the continued existence of two separate categories of off-line retailers, those with pre-2010 leases and those with post-2010 leases, each paying widely varying rents for the same properties, is an utterly unsustainable situation.
Debenhams is merely the latest Irish-based retailer to go down the examinership route as it attempts to extricate itself from upward-only rent review leases. It almost certainly won’t be the last. The government of the day chickened out of tackling the issue of upward-only rent review leases in 2010. Now it seems as if the market is about to do the job instead.