Retail landlords poised to pull the plug on defaulting tenants, says law firm

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Darina Kerr, partner in the real estate team at law firm, Dundas & Wilson, considers the likelihood of retail landlords taking enforcement action against defaulting tenants and pulling the plug after a rather disappointing Christmas trading period

“After a tough trading year, many retailers were counting on a bumper festive season, having found their winter cash reserves severely depleted after stocking up for Christmas and forking out for rent payments made on the September quarter day. They hoped Christmas trading would provide stores with the cash to survive. But many are now finding that their tills didn’t ring loudly enough for their creditors to hear.

“At the September quarter date, there was a feeling  for some landlords, taking enforcement action against defaulting tenants would be like pulling the plug before filling the bath. Many took the view that it was better to wait and see whether Christmas provided the traditional trading boost rather than jumping the gun.”

“But now many landlords are actively assessing whether it’s time to pull the plug. They will be reviewing the accounts of tenants who failed to pay rent due at the 25 December quarter date, and considering whether holding off on enforcement action until the next quarter date in March may just be prolonging the agony.

“Many tenants have already been given the ‘recession concession’ of being allowed to pay rent monthly instead of quarterly by a significant number of landlords. But most tenants with large portfolios of shops have a range of different landlords, some of whom are likely to be insisting on rent being paid every quarter.

“Even tenants who have negotiated monthly rents on a high proportion of their units may not have substantially decreased their risk of insolvency. Monthly rents provide a short-term cash flow advantage, but the rent still has to be paid, albeit less often.

“Undoubtedly 31 January will be circled in red on many retailers’ shiny new calendars. One month into 2012, the sales are now over and both retailers and landlords are facing up to whether festive trading was fabulous or feeble.

“With only a few days of January left, we may be unlikely to see any more ‘January fails’ but the risk of February flops seems significant.”