The former boss of Molton Brown is set to take charge of The Body Shop in a rescue deal that will keep 133 branches open.
Administrators at FRP said they had sold The Body Shop to a consortium led by cosmetics tycoon Mike Jatania after weeks of exclusive talks with the entrepreneur.
Charles Denton, the former Molton Brown chief, will become chief executive.
The move is expected to save more than 1,000 jobs, with Mr Jatania’s investment company Aurea understood to have no immediate plans to close any more stores. The Body Shop currently employs 1,300 people.
The new owners may look at finding better locations for current shops in various towns and cities, sources suggested.
UK commercial leases are 21, maybe 25 or 30 year things. With 3 or 5 year rent reviews. Rent reviews are upwards only.
Now, if commercial retail gets into trouble – Hello Online Shopping! – the system is hugely inflexible. Extant shops can’t negotiate their rents down. New market entrants can gain very much lower rents. Incumbents are therefore prey to new comers.
The way out is bankruptcy, administration or there’s a third similar thing. At which point you get to tell the landlords to go pound sand. And negotiate your rents down. Also, be free of thsoe 20 odd year commitments to specific leases.
Which is, I insist, what the Body Shop admin/bkruptcy/whatever it was was all about. Being able to screw the landlords. Perfectly viable business in there, storied brand name and all that. But got to get the cost base – the rents, rightsized. Commercial leases whose rent reviews could be up or down would have made it unnecessary.
Note, this may not be 100% oand only this be true. But I guarantee you it’s a lorra ‘f it.
So who’s at fault here? The commercial property company for trying to extract the highest rents possible or the high street chain for using bankruptcy / administration to get out of commercial contracts that no longer reflect economic reality.
Upwards only rent reviews are a distortion, especially when the reality is that there is more downward price pressure on commercial rental because of increased competition from Internet only and delivery to your door operations.
Make upwards only rent reviews unlawful via UK competition law and it both prevents that distortion and the need to go through bankruptcy proceedings to get rents renegotiated.
The problem here being that the valuations of commercial property companies are based upon the inflated contract value of those 20, 30 year contracts, so forcing changes would burst the artificial inflation of that bubble.
No, you don’t want to make contract terms illegal. And you certainly don’t want to make them retrospectively illegal. The certainty and also flexibility of English commercial law is one of the grand attributes of the country. No, really.
Sure, but the reality of making these terms illegal would not be that the contracts themselves become invalid, only the clause relating to upwards only rent reviews. It would certainly trigger lots of contract renegotiation, where the appropriate and current market price could be discovered.
Playing pretend that these contracts still retain the value that they did when they were setup is worse since it allows the over valuation of commercial property to continue without respite.
Surely it is not illegal to renegotiate downwards voluntarily? Just that the incentives for landlords to do so are limited?
I’ve been involved in negotiations with property companies, you couldn’t build a microscope strong enough to see my sympathy.
Why can’t you negotiate rents downwards?
Sure there may be a clause in the contract stating the landlord is entitled to increase rents (via some formula or other) but the tenant not entitled to decrease them using the same formula. But also any contract can be terminated if both parties agree – and if the contractual expectations are at odds with arithmetic reality guess which wins?
So if you tell your landlord you will be unable to continue paying the rent demanded, and the landlord’s options are to either reduce the rent or get no rent at all because you will declare insolvency, that would seem to be pretty solid incentive to the landlord to reduce the rent. If that involves tearing up the old contract and writing a new one, so be it.
Exactly the point I make. The only way to get out of a British lease is to go bust. Which, you know, sorta pisses the shareholders off. But is what Body Shop has done.
BiG:
Likely the landlord also has a mortgage, based on the rent he can demand. If he negotiates downward, suddenly all the other tenants are asking the same thing. And he gets a margin call (or whatever the equivalent is for mortgages), and he may end up bankrupt as well.
This is also playing out in NYC. There’s a lot of vacant properties, with enormous rents still being demanded. They can’t lower the ask, because that triggers the bank looking harder at it.
As long as they can keep up the pretense that someone will come along and pay that rent, and they’re paying the mortgage payments, the bank is less likely to look at their balance sheet and say “You’re overextended mate. We need more security.”
It’s also likely in the bank’s interest to whistle past that graveyard. If they have to take a look at a lot of landlords at once, *the bank* may be in trouble since mortgages for commercial properties aren’t covered by the same policies as homes…
Do shops really sign 20+ year leases, with no option to break? How do new shops ever get off the ground if those are the standard terms?
I assume these 21/25/30 year leases with rent reviews after 3(!) or 5 are in the retail sector.
Industrial properties are very different with 5, 6 or 10 years the norm in my experience. However the biggest factor to consider is break clauses, usually every 5 years but occasionally at the end of year 10 for new builds. Signing up to 20+ years with no breaks seems highly unattractive unless, as previously stated, we are talking about retail and particularly prime high street sites. Even then what was prime barely 10 years ago may now be anything but courtesy of rapid demographic changes.
Maybe “Turkish” barbers and nail salons are willing to take the long view as their business models do not appear wholly reliant on actually making a visible trading profit?
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As I’ve commented previously, there’s also the problem that commercial properties are valued by rent x a multiplier, so if you reduce the rent, you reduce: the book value of the property: possibly the viability of the property fund; and certainly the annual bonus of the investment director. So companies prefer for a property to remain empty at an artificially high rent than to let it at a lower one.
The long contracts are with the large property companies, I suspect. Shops down my way are available on a 1 or 3 year lease.
Individual commercial premises in small towns tend to be locally-ish owned and you’ll be negotiating with the owner. Town centre premises in larger towns and cities, and anything on a park/complex/etc. will be owned by a big corp. Renting a small shop in a small town is not that dissimilar to renting a house, but something on a trading estate or in a shopping centre? If you’re not a chain they’re not interested.