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It took a pandemic, but Solomon Lew finally torpedoed the landlords

Lew is no stranger to playing hardball.

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Now that the majority of Premier’s shops are set to reopen, he has issued another decree – no longer will his retail brands pay a fixed amount of rent. In his new retail order, he is prepared to pay only a percentage of gross store sales, and (understandably) this will be made in arrears.

This begs plenty of questions. Firstly, will the lease deal revert to the ‘normal’ terms when the pandemic is over? Neither Lew nor his retail lieutenant Mark McInnes are making any promises on that score.

It looks like Lew will use this pandemic as the thin edge of the wedge to permanently recast his stores’ rental agreements.

In any event, even if Premier decides the new lease agreements are an interim measure, the second question is at what point will retail conditions be deemed back to normal. It could be months or years before the health and the economic environments return to pre-COVID-19 levels.

And if shoppers, who have now got a better taste for shopping from home, increasingly shift to online, some portion of bricks and mortar sales may never return.

It was only in 2018 that Lew and McInnes did something of an about-face in Premier’s strategy to expand Smiggle in Europe via physical stores – and opted instead for a capital lite wholesale and digital rollout.

Premier Investments, which owns chains such as Jay Jays, Just Jeans, Portmans and Smiggle, is the largest retail tenant in the country.

Premier Investments, which owns chains such as Jay Jays, Just Jeans, Portmans and Smiggle, is the largest retail tenant in the country.Credit:Edwina Pickles

The bad news for property-owning landlords is Lew has plenty of leverage. Premier is the largest retail tenant in Australia, so he has plenty of bargaining power given 70 per cent of its shops’ leases are either in hold-over or expire in 2020. Thus if Premier doesn’t get the deal it wants from landlords it can walk away from the shops with no liability.

While this is no hollow threat, realistically Premier doesn’t want to shutter the majority of its physical shops.

And if Lew cuts a deal, it could be a cue for others to follow – all of which is a dangerous harbinger for landlords.

It looks like Lew will use this pandemic as the thin edge of the wedge to permanently recast his stores’ rental agreements.

How all this sits with the government’s intentions to provide rental relief for COVID-19 affected retailers is not particularly clear.

The Lew camp says that paying rent in proportion to sales is precisely what Scott Morrison was intending when he announced in early April that landlords “will be required to reduce rent proportionate to the trading reduction in the tenants business over the course of the pandemic period, through a combination of waivers of rent and deferrals of rent….Waivers of rent must account for 50 per cent at least of the reduction in the rental provided to the tenant during that period.”

The implication of that announcement was that it would apply to smaller retailers and that the big boys of retail could negotiate deals with landlords.

That said, most of the big retailers are actively doing deals with landlords. Some, like Woolworths with its 60 BigW stores, are said to be prepared to bear the cost of walking away from their lease agreements, while Target is reviewing what to do with its 280 stores.

If these new rental deals last beyond COVID-19, there will be a permanent diminution on the asset value of retail property.

And therein lies the risk for investors in large retail real estate investment trusts.

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