Downsizing can bring its own problems for retailers

Aug 6 2008 by Tony McDonough, Liverpool Daily Post

THE current economic downturn is affecting us all. Higher food prices and fuel bills, coupled with increasingly expensive mortgages, has dented consumer confidence and although high streetŠ sales have remained robust, major retailers are warning of leaner times ahead.

Some retailers are planning to downsize to help them cope. Currys, B&Q and Homebase have all recently announced plans to reduce their rental costs by exiting stores in unprofitable locations.

But downsizing isn’t without its problems, and it’s unlikely that a lease agreement will come to an end just as the tenant wants to exit it. Many lease contracts have stringent conditions regarding early redemption and could require large payments to be made to the landlord in return for termination.

In the rush to be rid of a loss-making store, or to end a contract with large rental payments, there comes a risk that negotiations will be hurried and that lease termination payments will be paid without any investigation into how to make the deal more tax efficient.

Certainly, agreement to structure the payment such that it is more tax efficient for the landlord could well result in a stronger negotiating position on other matters, or even a reduction in the amount of repayment.

But there are two sides to any story.

Downsizing by retailers obviously causes problems for landlords.

A walk through any town centre quickly reveals a number of empty shops, and the recent withdrawal of empty property relief for business rates isn’t the only cost that will concern landlords.

For example, despite a high percentage of the new Liverpool One centre being let, much of the commentary about its opening earlier this year concerned the amount of empty space.

Furthermore, as only half of the space in the centre has been taken by names that are new to the area, there are worries that those whose stores are replicated elsewhere in the city will leave, concentrating on their new stores in Liverpool One.

Finding workable incentives for tenants is therefore essential, and the decision over the types of incentives to be offered shouldn’t be hurried, as the deal needs to bring benefits to both sides.