As the casual dining crunch is in full force, Goodman Derrick discusses rent and business rates within the foodservice industry.
Much cited in connection with the so called casual dining crunch, and in particular the high profile failures in the sector, is the part played by the cost of rent and business rates. So what has been going on there? And what might you do about it?
Nearly all casual dining ventures will hold their premises under a lease. So the biggest fixed costs of the site will normally be the rent under that lease.
Rents in certain areas, particularly in central London, have been moving firmly (and sometimes sharply) upwards for many years.
Some operators in those areas have found themselves in sites which were profitable, but after rent reviews or lease renewals, have become unprofitable.
Equally, some operators have fallen over themselves to pay higher rents in order to get into specific areas; in the case of one of the recent high profile failures, the rent being paid at one of its units was almost double that of an almost identical neighbouring unit.
Smaller, independent operators, whether incumbents or entrants, have been forced into other areas where the rents are cheaper, which may or may not be a good thing.
So what might operators learn from this and then do about it?
When it comes to taking on a new site, even where there is steep competition, it is worth getting the view from a professional as to the market rent in the area, and of course do the sums. If the rent is a million pounds per year, that’s an awful lot of business that will need to flow through just one premise.
When it comes to an existing site, similar advice applies. Get a good professional on any rent review or lease renewal, and do not be afraid to fight your corner. The current state of the market means that some landlords are feeling the pinch. So there may even be an opportunity to go below the local comparable rent levels or to achieve some other concession.
Whether there is a formal opportunity to look at the rent or not, think about approaches that might in any case be made to a landlord to argue for a rent reduction or rent restructuring. Could, for example, the rent be paid monthly to ease cash flow? If you don’t ask, you won’t get!
What about business rates? The issues with business rates, in large part stems from the large gap between the previous revaluation in 2010 and the one last year (which had been deferred from 2015). That lead to a bigger than normal jump in many areas. The double digit percentage increases in rent in certain areas did not help, and of course we must not forget that in some parts of the country the rates actually went down rather than up.
Nevertheless, if you are in a position where the rates have jumped noticeably, and have as a result had an adverse impact on your bottom line, what might you do about it?
The bad news is that the appeal process is being made considerably harder and longer. That is mainly due to the hoops you now have to jump through. That said there are still surveyors who specialise in this area who will often act on a “no saving no fee” basis. So you have everything to gain and nothing to lose!
Heading for the Exit
If you are going into a site and the rent and business rates levels are on the top side, then not only do you need to consider the business case for taking the site, but if you do take it, then you need to have an exit strategy. The obvious one would be to include a tenant break clause.
If you are already in situ, there is no break clause, and approaches to the landlord have come to nothing, then you need to look at the lease to see what time frames apply. So is rent payable on demand or within 14 days of demand? When does interest apply? Look at when forfeiture potentially kicks in.
Ultimately being clear as to those timelines means that you have visibility on some of the potential bumps ahead in the road. It doesn’t get rid of them. The practical step to take is to bring in an insolvency expert sooner rather than later. They can advise as to the options and the potential exit strategies, should the worst case scenario come to fruition. Whilst ultimately this may seem rather negative, in business you have to look at the down cycle as well as the upcycle, and be prepared for both.