Member Article

Commercial rent rules need clarification warns expert

Commercial rent regulations are hampering attempts to save struggling retailers and are in serious need of clarification according to a North East insolvency expert.

The latest Quarter Day is looming, and could signal another round of job losses and closures - which could be avoided through better understanding of the rules around commercial rents.

Steve Ross, the chair of the north east arm of insolvency trade body R3 and director in the Corporate Recovery department of Sunderland firm RSM Tenon is now calling on the Government to do more to help insolvency practitioners to give more companies in administration a greater chance of rescue.

He said: “Quarter day will always present a challenge to struggling retailers, especially those that agreed leases during the good times which still have many years to run at very high rents.

“The internet is cannibalising ‘bricks and mortar’ retail, and with a 12% drop in footfall on the high street in the year to April, retailers need to adapt their business to stay in the game, but this is doubly challenging if they are faced with too many underperforming stores held on long and inflexible leases.

Quarter day payments traditionally fall in March, June, September and December, and represent a significant outgoing for firms in the present climate. In the equivalent quarter day in 2011, the largest wave of retail administrations were witnessed since the height of the recession.

Names including Habitat, Zavvi and The Officers Club have fallen into administration in the run-up to or period immediately following Quarter Days over the last couple of years, as the pressure to meet property rental payments has finally proved too much for their finances, and addressing rental costs remain a central issue in the ongoing retail administrations today.

This has resulted in the lost of over 21,000 high street jobs, due to difficult economic conditions and the rise of internet sales. New research also indicates that more than a quarter of retail businesses are currently in the ‘caution’ or ‘high risk’ band, in terms of likelihood of company failure in the next twelve months.

Steve continued: “Greater clarity is needed around the issue of rent due in the event of an insolvency, both in terms of whether it counts as an expense of the administration and over what period. Currently, advance payment for a quarter’s rent is required despite actual usage, and even if an administrator might only use the premises for a short period of time, they are liable for a full quarter’s rent.

“The net effect of this is that it is often harder to trade a business during an administration - more businesses that are failing could be saved if the Government removes this uncertainty, as a company that is sold as a going concern will almost invariably both recover more for creditors and save more jobs.

He is also encouraging businesses to negotiate with landlords to stave off rent related insolvency, although directors must also avoid trading illegally while insolvent.

He also suggested measures including paying on a monthly or ‘pay as you go’ basis, which could enable retailers to plan their cash flow more effectively.

This was posted in Bdaily's Members' News section by Ruth Mitchell .