Why are retailers being threatened by landlords with legal action?

Summary

• The Entertainer, Hugo, and Pret A Manger have received warnings from Westfield threatening legal action over the outstanding rent
• The regional managing director of Unibail-Radamco-Westfield, Scott Parsons said that working in partnership with the retailers has been its strategy
• Landlords have accused Clarks of abusing insolvency processes with the launch of its restructuring plan

The unprecedented coronavirus that has spread rapidly across the world has had a tremendous impact on commercial businesses. From implementation of social distancing measures, travel bans, and self-quarantining, to mandatory closures of restaurants, retail, entertainment, and other non-essential businesses, the Covid-19 has wreaked havoc on the economy.

Both the retail landlords as well as tenants had not been immune to the effects of the mentioned factors and changes in behaviour of the consumers. A decline in the mall footfalls was the most immediate impact of the Covid-19. Total rental income of the mall owners went for a toss because of no revenue collection during lockdown.

Westfield Threatens Retailers of Legal Action

With England entering a second lockdown, Westfield, the landlord of prominent shopping centres across the nation threatened retailers like Hugo Boss, Pret A Manger, and The Entertainer with legal action over unpaid rent.

Gary Grant, the executive chairman of The Entertainer informed that a letter regarding the legal threat had been issued by Westfield but the same was withdrawn on the first day of England’s month-long lockdown, i.e., 5 November 2020, after he contacted his local MP about the dispute. Grant accused Westfield that the firm had ignored the attempts made by his company to engage with the landlord during the pandemic. The letter issued by Westfield hinted that the firm would consider taking enforcement action if the rent arrears were not paid within a week’s tenure.

Two out of the 173 stores that were operated by The Entertainer around the UK, are located within Westfield Stratford City and Westfield London. Half of the annual revenue of the toy retailer usually comes from the peak trading period leading up to Christmas, which is considered as the golden quarter. In the four weeks to Christmas Eve, 50 per cent surge in the revenue was recorded. But when most of the stores of The Entertainment went into the lockdown for a month, it was uncertain whether it would be able to generate revenue in the usual golden quarter.

The fashion retailer Hugo’s Boss and food retailer Pret A Manger also reported that they had been asked to either clear their outstanding rent or face legal action from Westfield. In order to reduce the costs, Pret A Manger has announced more than 3,000 job cuts from the time the pandemic began.

The regional managing director of Unibail-Radamco-Westfield, Scott Parsons said that working in partnership with the retailers had been the strategy of the firm. It considered legal action only if there came a situation where a tenant refused to collude in subsequent agreement that could be favourable for both parties.

Westfield Corporation was established in 2014 as an Australia-based commercial property estate. Westfield, the global operator of shopping centres had disclosed a decline in net rental income by 14.2 per cent like-for-like to €1.06 billion for H1 2020 (H1 2019: €1.13 billion). During the first half of 2020, malls were forced to shut down during coronavirus induced lockdowns.

Clarks Accused of Abusing CVA

Landlords had accused Clarks of abusing insolvency processes with the launch of its restructuring plan. After the firm paid out dividend to shareholders belonging to the family, the landlords said the company had not been able to meet the conditions of the company voluntary arrangement (CVA).

Melanie Leech, the chief executive of British Property Federation said that the property owners were forced to absorb significant losses because of such abuse of CVAs. As economic partners, they were only left with little attempts to frame an approach leading to recovery.

In the previous week, the company had rolled out a CVA, featuring turnover-based and zero rental terms. As per the CVA, 320 of Clarks’ stores in the UK had moved to rents based on turnover and 60 of the shops will shift to zero rent, and all the arrears accumulated during coronavirus period would not be paid.

Landlords of Clark had a total debt of £160 million ($211 million) which would have to be compromised as per the proposed CVA. A CVA requires at least 75 per cent of votes to be approved and landlords account for less than 25 per cent only.

The private equity firm of Hong Kong, LionRock Capital and Clarks had entered into a rescue deal, securing £100 million. With the deal, Clarks family became a minority stakeholder, whereas LionRock Capital moved to be a majority stakeholder in Clarks, the 195-year-old shoe retailer. Approval of the proposed CVA by the retailer was the only condition based on which the deal was done.

Finally, the physical retail sector selling non-essential items has been hit hard because of the lockdown imposed by the government. Trade bodies of the sector have been urging the government to introduce a “property bounce-back grant”. This could cover for up to half of the rent.