What lies in store for Intu’s tenants if shopping centres are forced to close?

Retail property was already going through seismic change prior to lockdown amid changing consumer habits and the continued surge of e-commerce, amongst other things.

Retail landlords have struggled (you only need to look at the comparative share prices of the large retail landlords) and the lockdown has exacerbated the situation. Even though all retail stores have been allowed to re-open since 15 June 2020 and there was an initial surge in footfall, it is almost 50% down on a year by year basis with even the re-opening of pubs and restaurants on 4 July only resulting in a modest growth of footfall. It is expected that the requirement not to wear face masks in retail stores may further dampen footfall.

It is perhaps no surprise therefore that one of these large retail landlords has gone into administration as the heavily indebted Intu was unable to persuade lenders to grant a standstill on debt repayments. As the June quarter rent date has come and passed, the dire state of affairs in terms of rent collection for retail landlords would seem to indicate that Intu will not be the last. There is talk of an online sales tax which might in some way make a fairer playing field but, at the same time, there is also talk of a land sales tax to replace business rates and payable by the landowner which would likely add further pressure on the finances of retail landlords (although the cost you would expect to be passed down in some way to tenant occupiers, if occupied of course). All in all, the picture for retail landlords looks bleak.

What does this now mean for the tenants of the shopping centres owned by Intu which are now in the hands of administrators? These tenants will no doubt be scrutinising the small print of the leases they have signed to check on their rights and obligations particularly if the shopping centres close.

If these centres partly or fully close, would tenants be within their rights to stop paying rent? It is unlikely that their leases would specifically cover what would happen if the premises could not be opened because the centre in which the premises are located is closed. However tenants could, in this scenario, argue that there has been a “derogation from grant” by the landlord (this is an implied obligation on landlords not do anything that makes the leased premises materially less fit for the purposes for which the lease was granted). Arguably, it is to some extent at least within the landlord’s control here as to whether the centre is closed and so by closing the centre and thereby preventing the tenant from trading from the premises, the landlord has made the premises less fit for the purposes for which the lease was granted.

Tenants would also presumably take advantage of the publicity to argue whether morally it is right for the landlord to be charging rent when the premises cannot physically open. This can be contrasted with when (non-essential) shops were not permitted to open during the lockdown imposed by the government when the “derogation from grant” argument would have been difficult to run by tenants as that was not imposed by the landlord or within its control.

Tenants may also seek to argue that there has been a breach of the “quiet enjoyment” covenant in the lease (this covenant means that the landlord must ensure that the tenant’s actual possession of the premises is not interfered with by the landlord (or others, depending on the wording of the covenant) so as to prevent, restrict or hinder the tenant from having possession of the premises, and the landlord must also prevent any substantial interference (which could be an omission or failure to act) with the tenant’s enjoyment of the premises. However a breach of the covenant for quiet enjoyment and a landlord’s derogation from grant cover much the same ground and courts have usually treated both as much the same.

What would be the effect on other tenants if an “anchor tenant” (such as a department store) closed or refused to open? You only have to look at the particular struggles of department stores to acknowledge this is a real possibility. Unless the leases specifically covered this scenario (and leases have been known to include provisions whereby a tenant can have their rent reduced or some other form of concession where an anchor tenant is not open when it should be as it affects footfall) then tenants of other premises within the centre would be obliged to continue paying their rent. Again, tenants may seek to argue the “derogation from grant”/”quiet enjoyment” principle mentioned above although, here, their argument is likely to be weaker than if the centre itself was closed as this is not a matter within the landlord’s control.

As administrators have stepped into the shoes of Intu as landlord under leases, how likely is that there will be legal disputes with tenants over unpaid rent? If shopping centres are fully open and in the light of the easing of lockdown allowing all shops to reopen, then under their leases it is unlikely there will be any reason why tenants should not be paying their rent.

One would also have expected rental concessions to have been agreed between landlord and tenant after the March 2020 quarter rent day where tenants were in financial difficulty and struggling to pay rent. It is anticipated also that we will see a lot of leases move from traditional fixed rent to turnover rents. Therefore unless the situation deteriorates (for example a fresh lockdown is imposed) then one would not expect there to be much by way of legal disputes over unpaid rent over and above the norm (there are always issues with rental arrears particular in large multi-tenanted buildings/shopping centres/retail parks).

Administrators will also be wary that, for the time being at least, the weaponry of the landlord to be used against tenants who fail to pay their rent is limited (and note rent here includes any amount payable under the lease so would include service charge, insurance payments, utilities and the like) and so, even if there was a legal dispute with the tenants over unpaid rent, there is little of substance that the administrators can do at present.

What if administrators cut the level of services (such as marketing, cleaning, security etc. for a shopping centre)? If these services are specifically referred to in the leases and the reason the administrators are cutting these is to save costs (and not because of matters outside the control of the landlord, e.g. lockdown) then it is likely the tenants will be able to argue that they should not be paying for these services if charged. Tenants should therefore seek a breakdown of what services they are being charged for.

The tenants may also argue again the “derogation from grant”/”quiet enjoyment” point mentioned above in that the cut in those services has made the leased premises materially less fit for the purposes for which the lease was granted, in order to seek a rent reduction.

Should tenants pay rent late (or not at all), then, provided the leases do not prevent from doing so (which would be highly unlikely), the administrators could charge interest on late rental payments. In view of the publicity surrounding Intu at present and struggling retailers, whether they would actually choose to do so, is another matter.

This article first appeared in Estates Gazette on 11 September 2020.