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Landlords and Tenants – a commercial bunfight!

  • 13 July 2020
  • Michael McGrath

It was interesting to read the article by Sue Mitchell in last week’s Financial Review talking about the current power balance shift between retail tenants and landlords 1.

As Bob Dylan once famously said, “The Times They Are a-Changin’

The shift in favour of a more balanced approach to dealing with retailers by landlords had been underway for some time and certainly predated COVID-19, driven largely by on-line shopping. However, as Mr Stewart of KPMG noted COVID-19 may have speeded things up, in his view by maybe 5 years! In the US some reports suggest that online sales during COVID-19 went from 15% to 30-35% of total retail sales – the jury is still well and truly out on where that number will end up in the future both in the US and here in Australia. Our starting point was lower, according to IBISWorld, at around 10% 2.

Our own current experience as we work with our clients during these negotiations is that the there is significant chop and volatility underway as attempts at agreement are played out with a backdrop of significant uncertainty. We are seeing the best and the worst of human behaviour on display, from bully-boy landlords still in denial to reports of larger opportunistic retailers taking advantage and not being in anyway proportionate. Whilst at the same time we see other landlords being accommodating and fair while many tenants try and find the sensible center. We are seeing 25%-40% rent reductions and at the same time witnessing landlords holding or increasing rentals. This commercial bunfight will continue to play-out for some time as the market finds a new level. This process is not easy for anybody, as the saying goes “no matter how thin you slice it there is always two sides”.

As usual the small guys without the ability to lawyer-up and stare down the bullies get squeezed. Landlords seem to be kicking the can down the road on the assumption that things can only get better and that maybe it will be business as usual before we know it. Retailers on the other hand are trying to negotiate rents that take into account and reflect a potential longer-term softening of bricks and mortar revenues. The uncertainty is excruciating for many small retailers, with everything on the line, they are often rushing to sign deals to remove the contingent liability of not knowing how much back-rent they may have to pay from April whilst trying to agree new terms for three, five or seven years ahead.

It will be interesting to see how much actual structural change emerges in the months ahead and how much that will positively filter to the small guys – I hope we see more and more genuine attempts to get to that sensible center – watch this space!

1 https://www.afr.com/companies/retail/power-balance-shifts-as-shopping-habits-change-20200616-p5538f

2 IBISWorld Report – Online Shopping in Australia, May 2020

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