The Internet has killed the High Street! How often have you heard this? Out of town shopping is the reason why our shops are closing! Another common refrain. Something you don’t often hear about is the truth behind why our high streets are no longer thriving and the cause has been in place long before we were shopping online.
High Streets used to be a prestigious place to trade from. Big branded shops sat alongside long established family businesses and the streets were full of shoppers. People took pride in their shop windows and cleaned and maintained the pavements outside their shops and they had good reason because they were invested in the town and people cared about making it an attractive place to be.
So attractive was it that it used to be very difficult to get a landlord to agree to rent to a small start up business. Hard to believe that now, isn’t it? New businesses would have to court landlords and would only be given shops in the least desirable locations, the more prime areas being restricted to tenants that were more attractive. An attractive tenant is understandably a company who could not only afford to pay the rent but who would also be likely to be there for a very long time.
What’s wrong with that you may ask? Anyone would look for the same thing if they were a landlord and I’d agree with you, but doing what is right for one person is not always the same as doing what is right for all. One of the consequences of this situation was that only wealthy people could afford to buy shops and only large companies could afford to rent in prime areas. This resulted in the high street being full of small, family owned businesses who also owned the property they traded from and large multiple retailers. Commercial investors understood this and saw opportunities to make more money from the larger retailers. They developed their plans for the High Street, realising they could build indoor shopping centres that customers would prefer to the outdoor space, and that they could charge more rent for. They could spend eye watering sums buying up land and building new structures, safe in the knowledge that the retailers would pay for their projects and then some. Retailers saw shopping centres as fantastic opportunities and competed with other retailers for space there, year on year paying more and more as they outbid each other. This encouraged developers to build even larger out of town shopping spaces that gave shoppers easy, convenient places to park. Retailers were prepared to pay even more for what they saw as bigger and better opportunities to make more money. It didn’t really matter to them what the price was that they were paying for rent because so long as they were profitable and they were there instead of their competitors then that was what really mattered.
You will be familiar with the large empty spaces these out of town shopping centres left the town centres with, but sadly it didn’t end here. What we saw with the rise of the mobile phone was telecom companies opening on the high street in small shops in prime locations. These businesses were highly profitable and could afford to pay vastly more in rent than any other small shop would have paid in the past. By paying a high rent in a small shop, the price of property was over inflated which was terrific for landlords. Rent is calculated on an amount per square foot or meter. If you have a new shop next door to your shop renting for a high amount per square meter, suddenly, your shop is worth considerably more. This allows landlords to re value their assets higher, borrow more and charge tenants more money. Many tenants are in leases where they can only leave at the end of the term or when there are specific lease break options. During the period of a lease, it is normal to have rent reviews, which are commonly described as “upward only” meaning rent will not fall but can go up, and tenants may find themselves forced to pay more rent without being able to choose to stop trading from the unit.
Not only did mobile phone shops force up the price of rents but they also forced up the price of business rates, which are calculated on the price that shops are rented out for. The Valuation Office, a department which works independently from Government, gather all information on rents from tenants. They also examine lease agreements to understand the terms contained in the leases. The Valuation Office categorises shops on the High Street into areas that they believe are connected in some way. For example, shops on one side of the road may be grouped separately to shops on the opposite side and shops on the same side of the road can be broken down into sub groups. Shops above street level are also valued differently. In my particular street, all shops on my side of the street from 1 to 49 on street level are part of the same group and numbers higher than that are rated differently. The assessors in the valuation office determine an average of the rents in one particular area of the town and then rate all shops in that area as the same value per square meter. However, the rules governing them don’t take into consideration that tenants in long term upward only rent reviews don’t have the opportunity for rents to fall and their guidelines mean that new shops that open are taken to be more representative of current market values. Hence a mobile phone shop paying three times the normal price for a small shop can push up rates in that area for all surrounding shops. Not only does that make the rates higher, landlords use this independent assessment of the valuation of their properties to justify rent increases. They can say to a tenant that the reason why the rates have increased is because the average rent of the shops in that area has risen and so they will be increasing their rent so it reflects that market trend. This is how commercial rents are kept artificially high.
As a tenant, there is very little you can do about this. Commercial tenants don’t have the rights that residential tenants do and in Scotland it is even worse than in England as we have no landlord and tenant act that gives some protection. It all comes down to what is in the commercial contract. Going back to what I said about start up businesses who have to woo landlords, I’m sure you can imagine that a new business is going to have a lawyer who is less experienced in commercial contracts than a landlord with several properties. Most commercial leases make the tenant responsible for all repairing and insuring for the building and many are forced to agree to sign “personal guarantees”. This means that if for some reason, say a downturn in trade or a tenant being unfit to work, the landlord can sell the tenant's family home to cover the rent. This doesn’t just cover the rent they have been unable to pay while they were trading. This is the rent for the full term of the lease. That’s right, rent that still isn’t due. Imagine you signed a lease for five years and after year one, you fell ill. Your landlord would have the right to make you bankrupt, sell your family home, take the remaining four years of rent from the proceeds of the sale and not bother having to have a tenant in the shop for the remainder of your lease. I remember hearing a man talk about what happened to him when he lost his home due to bankruptcy. He explained that he and his family were in emergency accommodation and he can still remember his shame when the energy companies explained that he couldn’t have an account because he had been made insolvent. I have also witnessed shop owners having to get jobs elsewhere as well as running their business so that they can afford to pay the rent on the shop that they are unable to make enough money from because it was either that or losing their home.
So when you walk past an empty shop on your high street, it doesn’t mean that a landlord isn’t making money from it but it most likely means that it has destroyed someone’s life.
You may have seen many of these empty shops on your high street that are not maintained. That’s because landlords have no responsibility to maintain their properties, this being passed on to the tenant and local authorities don’t seem to take any action. I have been advised by the local authority that they often have difficulty getting in touch with landlords who may be pension funds with addresses registered with accountants or they may be based abroad. Absentee landlords were the reason why our local town’s railway station nearly closed recently. There are currently no trains in or out to the south of our town because of the neglect to this building by an overseas landlord. In the UK, 55% of all commercial property is rented rather than owner occupied and 29% of those properties are owned by landlords based overseas. That’s £139 billion pounds of property owned by companies that our government has no power to ensure they maintain.
All of the problems I’ve described, created by landlords, were going on before internet shopping began. What the internet has done is make it very difficult for these large retailers to continue paying obscene rents because they are not longer eliminating the competition by doing so. They have burdened themselves with costs that online retailers don’t have and that means online retailers can provide shoppers with better value for money while being more profitable. That’s why large stores are closing.
The combination of landlord’s greed and retailer’s vanity has killed the high street and it is not coming back unless shops can be owned by the people who trade from them. Currently 45% of shops are owner occupied. Owning a shop means that the costs for the trader are fixed. It means that rates are not pushed up by temporary changes in the market by large multinational companies over paying for rent. It means that the trader has an asset in their accounts that they can borrow against and that they have security that they know they will not lose their shop at the end of a lease or be forced to over pay to keep that location. If trading slows down, the trader has the option to sell the property. Trading from a shop you own is not just something that would be beneficial to a small business but it is now the trend for big brands in prime locations like Prada. Meet the luxury owner occupiers via the Independent newspapers.
However, we are not seeing the true reduction in the price of commercial property in the failing High Street that would bring prices within reach of small traders and sadly that is in part due to the Government. The UK government has given local authorities over £3.8 billion pounds to pump money into commercial property in the hope that Local Authorities can make money out of renting to hard working tenants. All this will do is perpetuate the cycle.
What we need to see is a High Street revolution that really addresses the reason why it has failed. We need to get to a point where traders can borrow money to buy shops that they maintain and occupy for a long period of time. We need to build lasting relationships between shop owners and the local community and we need the cost of running a small shop to be affordable. We don’t need new landlords.
Not all landlords are awful and not all shop owners want to own their shop, was the response to my brief tweets on this subject. I completely agree that landlords who maintain their properties and support tenants through tough times are a great asset to a town centre, but as you can see from the state of your high street and the statistics of the number of overseas landlords, they are few and far between. I think start up businesses should be able to rent on short term leases with no repairing responsibility, as these clauses are often unfair. All property owners should be solely responsible for the building. Once a business has been established and is successful, there are no downsides to a tenant owning their shop and plenty of benefits to the local community. What we need is for the government to stop throwing money into the sector in the hope that they can prop up their debt and turn a profit from a retailer because all that they are going to do is find that they don’t make money from it and that they really do put the final nail in the coffin of our High Streets. Put that money into the NHS, put it into services and leave the High Street to regenerate in a way that has long term sustainability.
Far from being the reason why the High Street is failing, the internet has provided small businesses with affordable ways to advertise to customers and reach people across the world in a way that wasn't possible before. Internet shopping is something that has been great for the High Street. What hasn't been good for the High Street has been greedy, irresponsible landlords who seek to make profit without caring about the consequences. What you are seeing is not the death of Retail as the newspapers are reporting. What you are seeing is the bursting of a property bubble and it is the large retailers that are failures and they are not coming back.
The future of our High Street relies on shops that are there for the long term, small businesses that give excellent, personal service and in order to see this revival on our High Streets we need to make it easier for those kinds of businesses to open up and commit to being there with low overheads so they can compete with online retailers. There is no better way to encourage this than to make it affordable and easy to own a shop.
Integrity needs no rules said Albert Camus but I think we all know that the people who operate with integrity when there are no rules are few and far between. The Government should be putting rules in place that ensure people behave with integrity instead of trying to profit from the very practices that have destroyed our High Streets and in turn our communities. .
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