What next for shopping centre landlords and tenants?
All shopping centres are continuing to trade.
That was the message from real estate giant intu properties plc, which owns and operates 17 UK shopping centres, when it announced on 26 June it had appointed administrators.
Jim Tucker, David Pike and Mike Pink from KPMG’s restructuring practice were appointed joint administrators for intu properties, as well as for a number of subsidiaries.
In a press release, KPMG said each of intu’s shopping centres, including Braehead in Glasgow, is owned individually by a special purpose vehicle (SPV). These are essentially outside the insolvency process so the centres continue to trade as normal while the joint administrators assess options for the business and group assets.
So, while it remains to be seen what happens with intu, here’s a look at what landlords and tenants in a similar situation would have to consider.
The tenant perspective
First of all, tenants should review their leases to check on critical dates for the likes of break options or serving notice to quit. Is there even an opportunity to re-gear: to renegotiate the lease terms?
Other than that, it’s a case of waiting things out.
If new buyers are found, they’d take on the benefits and burdens of the leases with the centre tenants.
One area where things could be less clear-cut though is if there are any side letters.
These can be useful when it comes to documenting concessions sitting outside the lease, perhaps for confidentiality reasons. These often include the likes of rent-free periods or service charge caps.
However, whether a new landlord would be obliged to honour its terms will depend entirely on the document.
Often the original landlord prepares them as a concession personal to the original landlord, though there is an obligation to secure a letter with the same terms from the next landlord.
If the original landlord doesn’t do this, the concession is lost. Ultimately it may not be worth the tenant pursuing the matter, that is the breach of the obligation to secure a new letter, if the sale was distressed and the landlord is, for example, in administration.
That said, you’d hope in the current climate, new owners would look on these favourably.
Shopping centres are often complex operations.
Braehead alone, for example, according to the intu website has more than 1.1million sqft of retail space as well as a leisure hub.
Working closely with specialist advisors, any new buyer will have to carry out extensive due diligence on the property. Considerations will include leases, service charge and employee arrangements. All of these underpin the centre’s ultimate investment value.
In the midst of a pandemic too — they may have to invest even more money quickly to adapt the premises to cope with social distancing.
And if they have to limit footfall for that reason, there’ll be fewer people through the centre doors.
There’s potential for redevelopment, but it’s highly unlikely.
Owners would most likely have to wait until all leases have come to an end, and it wouldn’t be unusual for anchor tenants — the likes of department stores or massive retail chains — to have long leases.
So while there are no doubt opportunities, it’s a challenging time for retail as the sector adapts to what the pandemic means for business.
Perhaps one positive for potential buyers is the cost of buying property like a shopping centre may be far less than it was even a few months ago, which may help to secure a higher yield on the investment.