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intu - just what will happen to its clients?

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. 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.

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.

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.

What would be the effect on other tenants if an "anchor tenant" (such as a department store) closed or refused to open? 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" 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. 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 so, even if there was a legal dispute with the tenants over unpaid rent, there is little 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. The tenants may also argue again the "derogation from grant" 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.

This article first appeared in CoStar on 10th July 2020. 

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