Tenancy woes likely to continue

NATIONAL: Independent clothing and footwear retailers say they feel more isolated than ever after a government report failed to address what they claim are the bully boy tactics employed by many shopping centre landlords. The comments follow the release of a report from the Productivity Commission which snubbed calls from small retailers for reforms to equip them with more bargaining power when dealing with shopping centre owners.

Despite acknowledging small retailers often had problems with their landlords over such issues as occupancy costs, churning and "unconscionable conduct", the commission found overall the market was working "reasonably well". "Hard bargaining and varying business fortunes should not be confused with market failure warranting government intervention to set lease terms and conditions," the report noted.

While submitters to the report identified a myriad of tensions between shopping centre lessors and retail tenants, the commission pointed the finger back at tenants stating that in some cases small retailers were simply unaware of what they were getting themselves into. It noted in some instances retailers had taken out business loans exceeding the term of the lease, tenants had franchise agreements beyond the length of their lease and tenants were working on the assumption that a new lease would automatically be offered.

"Many of the perceptions of shopping centres' 'misuse' of negotiating power stem from a lack of understanding or acceptance that the business model of a retail shopping centre is fundamentally different from traditional retail strips," the report says. "Retailers who sign a lease in a large managed shopping centre without realising that the 'rules of the game' are very different, are at a disadvantage and can be seriously disappointed, if not financially devastated. Retailers who do understand the shopping centre model, and work within it, can prosper."

The commission has recommended improved disclosure and information to help ensure tenants are made aware of their legal obligations along with a voluntary code of conduct, overseen by the Australian Competition and Consumer Commission, to govern landlord behaviour.

However fashion retailers spoken to by Ragtrader say the report does not go far enough to redress the imbalance power of bargaining power held by landlords. Jeanswest national property manager Kay Regan said one of the biggest hurdles facing retailers was the extreme rental increases requested by landlords and the expectation that high occupancy costs were sustainable. Regan described existing legal protection for tenants as "fairly ineffective" as major landlords worked hard to find ways around available legislation to lessen its impact.

"The legislation is designed to assist both tenant and landlord however there are various sections of the legislation that are questionable. For example the supply of sales figures to landlords affects most [yet] is of no real benefit to the retailer. In fact, it can be quite the opposite given landlords can often use the information to gauge the maximum level of rent they believe a retailer can afford to pay. The landlord has no obligation to reciprocate by providing foot traffic information to justify their rent."

Peter Pitt, the director of national footwear retailer Hype DC, said nothing demonstrated the imbalance of bargaining power more effectively than the rent differential between majors and specialists. Pitt, whose privately owned company operates 19 leased sites across the country, said it was common in major shopping malls for department stores and supermarkets to pay rents per square metre that were one tenth of the rate paid by small specialist shops in the same mall.

Lessors justified this on the basis the centre wouldn't have been built without signing the major tenant, the major tenant leases thousands of metres and the major tenant "attracts' lots of shoppers to the centre, he noted.

"The reality is that the 10:1 rent differential arises purely because the major tenant is in a strong negotiating position when entering into lease terms and the small specialist shop is not. Each of the lessors' justifications for a 10:1 differential could be turned 180 degrees.

[It could be argued] the centre wouldn't have been built without the hundreds of small specialist shops because if the lessor had to rely only on the rental paid by the major tenant the project would not be feasible. If the lessor had to negotiate the lease terms for a new centre with all specialist shops as a single group, there would not be a 10:1 rent differential between major tenants and specialists, he said.

Independent store owner Brandon Conway said shopping centre landlords needed to show more flexibility when dealing with prospective tenants. Conway, who has operated his business for 17 years, said tenants were faced with a huge capital outlay - often upwards of $200,000 by the time things such as bond and shop fittings were factored in - yet it was frequently only the tenant who lost money when the resulting venture failed.

"My feeling is that shopping centre owners are happy when the lease is signed; what happens to the tenant after that is for the tenant to sort out. The landlord should show a little more compassion and be more flexible when confronted with difficult economic times. They could recognise that through no fault of the tenant, he is faced with a downturn in sales that cannot be absorbed without the help of the landlord. More could be done to help distressed tenants rather than the attitude of, 'pay or we can discuss an exit strategy'."

Conway said there would be less conflict between lessors and tenants if landlords abolished all outgoings as a separate charge. The rental should be gross with all extras included, he said. "I am sure that all tenants would be happy with an all inclusive rental and let the landlord pay his own expenses for repairing and running the property. It would be easy for the government to legislate for this and would be one less irritation for the tenants."

Conway said while the current arbitration system was not perfect, it still provided an avenue that both parties could access without onerous costs. However, the voluntary code of conduct recommended by the commission would only work if both parties showed mutual respect, he said.

Both Westfield and AMP were approached for comment however neither had returned calls at the time of press.
However developer Theo Onisforou, a retail property owner responsible for both the Paddington Intersection and Bowral Intersection retail strips, agreed the suggestion of an inclusive rental package would increase transparency and assist both parties.

Onisforou said he was staggered by the number of "seemingly intelligent people" who did not understand that the rent quoted in negotiations did not usually include add-ons such as marketing levies and other maintenance.
"I prefer a gross rent, I don't like chasing people for money. It's easy for [Westfield founder] Frank Lowy, but much harder for smaller operators." Onisoforou said he did not believe a voluntary code of practice would improve the relationship between landlords and their tenants as voluntary codes were "not worth the paper they're written on".

By Tracey Porter