The Insane Rent Review Market
June 2018
CLH News
5
By Tim Martin, Founder And Chairman Of JD Wetherspoon
“I knew you were trouble when you walked in”, laments singer Taylor Swift, referring to an unreliable boyfriend. Her words summed up Wetherspoon’s view, when Jamie Oliver took a restaurant lease in St Albans a few years back, at about double our rent per square foot. In reality, in spite of the veneer of sophistication, it only takes one optimist to agree a daft rent and every tenant in the town ends up paying something similar. In the recessions of the last 50 years, subsequent tenant default has often been followed by landlord default and, sometimes, by bank default too, as occurred in 1974/5 and 2008/9. Unfortunately, it wasn’t just Jamie and St Albans. Dozens of restaurant chains followed suit, often opening together in the same developments around the country. A similar pub boom in the 1990s was followed by an inevitable crash. But for several years after the crash, rent reviews seemed to follow an insane upward trend. From that time, 16 or 17 years ago, Wetherspoon has agreed virtually no open-market rent reviews, either buying freeholds, or taking new leases with fixed uplifts and periodic ‘break clauses’. Another danger of the typical concentration of new restaurants is that a good individual business can be tainted by a failed overall development. Restaurateurs, like their pub cousins from the 1990s, have been victims of what the great investor, Warren Buffet, calls ‘the institutional imperative’- if everyone else has opened in a development , it’s safe for you to open up there too. Except that it isn’t, of course. So Carluccio’s, Prezzo, Jamie’s and Byron, all subject to financial reconstructions, have often opened within a stone’s throw of each other, creating a circle of incompetence, or reverse alchemy. And those who trade nearby, often longstanding locals, have been victims of massive rental hikes as a result. Wetherspoon has normally, but not always, stayed away from these developments, and has been wincing for years at the rents being paid- and congratulating ourselves on our foresight regarding open market reviews. But we’re not as clever as we thought. One epicentre of rental insanity is the Trafford Centre in Manchester, a mainly retail development. Some years ago, Wetherspoon agreed to take a lease of a failed restaurant there, at a rent of 10% of sales, or £220,000 per annum, whichever was the higher. Reviews would also be at 10% of sales, or open market. Although we don’t normally agree to open market reviews, we did here, reckoning that 10% our trade, which is normally much higher than rivals, was the maximum we’d be asked to pay, in practise. But a year or two ago, just before branded restaurants started to collapse, a major pubco, in a rush of blood to the head, took a smaller unit than us in the Trafford Centre, at a higher rent, reflecting the rents of recent restaurant lettings- which they now deeply regret. Based on the percentage of sales formula, Wetherspoon
had been paying about £230,000 per annum in the Trafford Centre, slightly higher than the base rent agreed a few years back. At the review, the landlord’s surveyor argued that the rate per square foot, based on the most recent lettings, would give rise to a rent of £691,000 per annum at our pub. The matter was referred to an arbitrator, who decided that the market rent was £415,000, about 20% of our sales, and just enough to ensure that the pub makes no money. If Wetherspoon can’t earn a buck here, it seems unlikely that the dozen or so nearby restauranteurs will thrive. One company has three restaurants in the centre and is reported by the press to have lost £78 million in its last year. So what’s the moral of this typical rent review saga? Maybe you can blame greedy landlords, who are careless of tenant profitability, with inevitable ramifications for service and standards. Or maybe you can blame the surveyors who should, by now, have created a system to limit the property industry’s chronic tendency to boom and bust. Or you could blame the rigidity of the rent review rules, which lack perspective or common sense, and have scant regard for the avalanche coming down the mountain. Or you could blame operators like Wetherspoon for agreeing to these deals in the first place. Whatever the answer, the property market is again making a bad situation worse, by pushing up rents in the teeth of a vicious restaurant recession, and in a climate where three or four pubs are shutting down every week. In her song Taylor Swift ended up “lying on the cold, hard ground”. Many restaurateurs and retailers now feel the icy blast, and would bail out of developments like the Trafford Centre, as would Wetherspoon, given half a chance.
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