Letter: Why Landlords Sometimes Prefer Empty Shops

Published on: 22 Dec, 2018
Updated on: 22 Dec, 2018

From Adam Aaronson

In response to: Lower Rents and Rates to Encourage Independent Businesses

Keith Parkin makes a good case for lowering rents of commercial premises, which definitely needs to happen if high streets are to survive.

He points out that “greedy landlords and developers refuse to drop their extortionate rents. They would rather see empty boarded-up units than charge realistic rents.” But he doesn’t actually explain why landlords would prefer to see empty properties rather than reducing rents.

I think that the main reason for this is that many commercial property rents, as well as business rates, are established by an outmoded comparison method.

New leases and rent reviews are typically priced on the basis of comparables. So in the case of new empty shops that can be found in Guildford, the landlord’s agents are likely to be quoting comparables that are based on other nearby rents, even if those properties are empty.

Indeed, in arcade-style developments, if a tenant puts their lease on the market, a landlord will often buy in the lease at a premium. They will then seek a new tenant to whom they can grant a new lease, at a higher rent, creating a new comparable.

Buying in the lease has the advantage of enabling the landlord to control the mix of tenants in a development. This makes sense because a good mix of retailers should create a stronger footfall. But it also enables the landlord to control the rental values, by leap-frogging the rent to create a useful recent comparable.

The new comparable becomes valid for rent review purposes, even if the previous tenant’s reason for selling up was that they couldn’t afford the lower rent in the prevailing market conditions. While this is not illegal, it is arguable that it is sharp practice. In contentious rent reviews, decided by an independent expert, such background evidence is usually disregarded on the grounds that it is anecdotal.

It is known that every time there is a downturn, shops are vacated because businesses cannot afford to operate on high rents. However, if at the same time landlords use the new rents established for those vacant properties to hike up rents on similar properties for those still trading, there is a risk that this can force some businesses to move out and some may end up insolvent.

It is important to bear in mind that commercial property is often owned by or linked to pension funds, which need to create growth. So although it is easy to criticise landlords, they may be partially constrained by their investment criteria.

However, if any more of the high street disappears, landlords won’t have much value left on their books, let alone income. Perhaps it is time for landlords to wake up and realize that half of something is better than half of nothing.

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