Australian Landlords and Retailers Struggle Over Changing Lease Models

Australian Landlords and Retailers Struggle Over Changing Lease Models

In the second half of 2020, UK based Legal & General (LGIM Real Assets) announced the launch of the ‘flexible partnerships model’, a new commercial leasing framework for retail and leisure occupiers. It focuses on turnover rent options, marking a departure from traditional and rigid long-term leases, to a fully flexible approach that brings optionality to occupiers from start-ups to superstores.

 While this model is not yet prevalent in Australia, Australian retailers are recognising the opportunity it offers. One example may be ASX-listed retailer Premier Investments, which has reportedly renegotiated to pay rent as a proportion of sales across its 130 UK based stores.

This precedent highlights how the lease is a practical instrument through which to manage and foster mutual interest at this pivotal point in retail’s evolution. Beyond immediate commercial terms, the leases can guide a landlord-retailer partnership by binding each party to shared initiatives that transcend commercial terms for desirable mutual benefits.

This, however, does not sit well with the Australian Retail Landlords who are sticking to the basic structure of leases which guarantees them annual rental increments, after conceding ground to tenants upfront on new deals struck following the disruption of COVID-19.

Major ASX-listed landlords such as Scentre, the operator of Westfield malls, and Vicinity Centres, have been striking new lease agreements at about 13 per cent lower as their tenants recover from the turmoil of the pandemic. Their sales fell by 27.9 per cent across their speciality stores, while the spread in rents between new leases struck and the old ones was negative 12.6 per cent. That difference improved to negative 4.1 at Chadstone, the country’s largest mall, and Vicinity’s premium CBD facilities.

Peter Allen, Scentre’s chief executive told shareholders at their annual meeting that the structure of their leases has not changed and remains based on the mutual agreement to pay a fixed base rent, a position fully supported by their debt and equity investors.

Major Australian retailer voices, including Solomon Lew’s Premier Investments and the Australian Retailers Association, rejoice over the landlord’s resistance as this means their income will eventually recover as fixed annual increases make up for initially discounted deals.

Property magnate John Gandel, who co-owns the country’s largest mall at Chadstone, in Melbourne, acknowledged the post-pandemic move to lower rents but ruled out a switch to turnover rents. “Once you’re on turnover rent, the tenant is in a position where he doesn’t even have to try to make a business. If he does fewer sales, he’ll pay less rent. That’s not a way of advancing the economy.”

Paul Zahra, Australian Retailers Association chief executive, was nevertheless adamant that a longer-term shift in the balance of power between retailers and their landlords is underway. “The golden days of landlords milking retailers is gone. This is a complete reset,” he said this week.

The Cohen family, owners of the prominent Collins retail destination in Melbourne, The Block Arcade, is also holding the line on the structure of basic rent deals while granting relief for those tenants who have needed it during the disruption. “Clearly, they’re pushing their own agenda. Turnover rent is not something we’d ever be looking to do,” Grant Cohen said.


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