Rising rents and continued high inflation could lead to more retail casualties on the high streets in 2024, according to a leading property lawyer.
Many corporate occupiers’ leases include rent reviews linked to inflation – either the Consumer Price Index or Retail Price Index - which has been seen as a positive in recent years, when inflation and interest rates have been lower.
Rabinder Chaggar
Rabinder Chaggar, partner in the commercial property team at national law firm Clarke Willmott LLP, says that although inflation may have peaked for the time being, the fact that it remains considerably higher than the long-term average spells bad news for many retailers - particularly those with rent reviews due next year.
“The high inflation and high cost of borrowing that we saw this year left many tenants facing potentially large rent review increases - even with ‘caps and collars’ - which helped caused the demise of well-known high street retailers such as Wilko,” he says.
“Corporate occupiers with linked rent reviews may be able to breathe a little easier in 2024 with inflation trending down, but at 3.9 per cent it remains higher than the long-term average of 2.8 per cent.
“We believe that until inflation rates come down to historical levels, corporate occupiers with rent reviews in 2024 will face material increases in rent that will impact on operational cost levels.
“This will lead potentially to more store closures and the demise of retailers on the high street.”
Rabinder Chaggar says the UK’s economic situation may also prompt changes in the way retailers negotiate their leases.
“Historically, landlords and tenants have operated rent reviews on an open market basis, which can give rise to disputes and commercial uncertainty.
“Over the last ten to 15 years there has been a trend linking them to inflation, to provide a degree of certainty in terms of cashflow. As with rent reviews, rates of inflation above historical levels, allied with high borrowing costs, could lead to a partial return to the old open market system in lease negotiations.”
Clarke Willmott is a national law firm with offices in Birmingham, Bristol, Cardiff, London, Manchester, Southampton, and Taunton. For more information visit www.clarkewillmott.com
