Retailers from Europe to the U.S. have sought rent relief as they reel from Covid-19 shutdowns and reopen stores faced with higher costs to meet health and safety requirements and uncertain sales prospects. Although some landlords have taken a hard line, many are trying to help keep retail tenants afloat through the pandemic.

Shortly after Italy’s lockdown began in March, Confindustria Moda – a trade group representing fashion, leather goods, shoe and eyewear associations and companies – appealed to landlords to suspend lease payments for closed shops and to renegotiate terms when stores reopened until business conditions return to normal. Valentino, Salvatore Ferragamo and department store OVS were among the signatories.

Helping out good tenants

Most Italian retailers requested rent cancelation or deferment when the lockdown began, says Mario Breglia, president of property research group Scenari Immobiliari. “The bigger landlords, in particular, are trying to give a hand to tenants that are solvent and have always paid the rent.”

One typical solution is to allow instalment payments for past-due rents. Many landlords also forgo penalties for breaking leases for shops forced to shut down for good. Smaller landlords, which may be family-owned and rely on individual rents for survival, are generally less flexible.

Italy’s government has granted a temporary 60 percent tax credit for commercial rent. The catch is that a tenant must have paid 100 percent of its rent, although some landlords have devised financing solutions to sidestep this problem.

When the epidemic hit the U.S., the initial response of shopping center owners in March was that tenants were obliged to pay rent. “When April came around, many became much more altruistic,” says Jeff Dervech, vice president of Plaza Advisors, a real estate sales investment firm.

Landlords with no debt on properties had lots of flexibility, he notes, while those with mortgage payments have often been constrained by the need to receive approval from lenders before giving rent relief to occupiers.

Going head to head

Landlords and tenants have sometimes gone head to head. Valentino sued the landlord of its Fifth Avenue store in New York City to terminate its 15-year lease. “In the current social and economic climate, filled with Covid-19-related restrictions, social-distancing measures, a lack of consumer confidence, and a prevailing fear of patronizing, in person, ‘non-essential’ luxury retail boutiques, Valentino’s business at the Premises has been substantially hindered, rendered impractical, unfeasible and no longer workable,” Valentino said.

Dervech believes more litigation is likely as tenants with business interruption clauses in their insurance policies discover that the pandemic is not covered.

Tabling discussions

In the U.K., where non-essential shops started to resume business in June in England and Northern Ireland and the rent bill is due quarterly, shopping center owner Hammerson is discussing rent deferrals, monthly payments, and waivers on a case-by-case basis. British Land has waived rent for smaller retailers. For larger tenants, a move to monthly rents, deferrals, and partial settlement of second and third quarter rents is on the bargaining table, generally in exchange for commitments like lease extensions.

British Land received 36 percent of third quarter rent from retailers in the UK by their June due date and Hammerson 16 percent. Shopping center operator Intu declared bankruptcy in June, evidence of the fragile position of some landlords.

Stores reopening face extra costs for health screening and security measures and great uncertainty about future consumer expenditures, says Dominic Curran, property policy advisor at the British Retail Consortium (BRC). Renegotiating rent can also be complex; one BRC member has 1,700 landlords.

The British government has helped lessen retailers’ rent burdens, extending a moratorium on collection of past-due commercial property rent to Sept. 30 and suspending local business rates – representing about one-third of a retailer’s property costs – for a year. But unless the U.K. government also finds a way to foot some of the rent bill once the debt collection moratorium expires, BRC foresees massive store closures and redundancies.

Burden-sharing

German retailers association HDE and property federation ZIA published joint guidelines encouraging landlords and tenants to talk to each other and suggesting a burden-sharing arrangement in which rent would be halved when stores were closed due to coronavirus lockdowns and reduced by a lesser extent afterwards. Some landlords have been more receptive to this proposal than others.

In Germany and elsewhere, there is also a feeling that tenants who can afford rent payments should do so. After announcing it would stop paying rents in April for its stores around the world shut due to lockdowns, Adidas was obliged to apologize and said it would pay up after all. German labor minister Hubertus Heil had called Adidas irresponsible, pointing out the company had made large profits in recent years.

Even before the crisis, HDE pushed for rents more closely tied to sales, as online retailers have cut into the profits of brick-and-mortar stores, particularly in Germany’s city centers. BRC’s Curran also sees a need to shift towards rents based on revenues.

London-based international designer factory outlet operator McArthurGlen took a step in that direction. From July 1 to Dec. 31, it will either charge turnover rent or a reduced minimum base rate at reopened centers as part of a rent relief package for tenants.

In the U.S., Detroit commercial real estate company Bedrock has given eligible retail tenants the option to waive base rent and instead pay a percentage of sales for the remainder of this year.

Retail partnerships

While many landlords, accustomed to the steady cashflows fixed leases provide, may be reluctant to shift to rent based on sales, Fitch Ratings also believes more turnover-related rents are coming as part of a “re-engineering” of the retail sector that is being accelerated by the pandemic.

That re-engineering process involves physical stores increasingly becoming “facilitators of unique customer experiences” to promote client loyalty and drive recurring sales rather than serving as stock rooms to display products. Physical stores are also increasingly supporting web-to-store channels that gained importance during the crisis. Retail landlords should “switch from being passive rent collectors to retail partners,” says Fitch.

The crisis has helped to speed up some partnerships. Unibail-Rodamco-Westfield Germany in April began working with Zalando through the German online fashion platform’s Connected Retail Program, acting as a sales partner to retailers in its shopping centers, giving them a new digital sales outlet and helping to improve inventory turnover.

Landlords in the U.S. and Europe have helped facilitate click-and-collect services that became popular during lockdowns. Dervech notes that some U.S. landlords have provided tenants short-term loans after vetting qualifications or helped them manoeuver through the bureaucracy to receive available financial assistance.