Apple Highlights The Nuanced Ethics Of Companies That Could Pay Rent, But Want Cuts
In recent weeks, tech giant Apple has joined the ranks of retailers that have asked landlords for a rent cut on their UK stores, impacted as they have been by closures during lockdown. With its demand for reductions of up to 50%, first reported by The Sunday Times, Apple joins a list of companies that could pay the rent they signed up for, but are choosing not to.
But unlike many retailers, restaurants and leisure operators, Apple’s balance sheet is in good shape. Its demands throw a light on the nuanced but tense negotiations ongoing between UK landlords and some of the world’s biggest corporations.
Just how solid is Apple’s balance sheet? At the end of June, it had $194B of cash or cash equivalents, much of it parked in tax havens. In April, May and June, it made an $11B profit, ahead of analyst expectations, because online sales of its products remained strong.
Apple declined to comment on its request for rent cuts.
Pharmacy chains Superdrug and Boots have attracted the ire of landlords. Boots refused to pay its second quarter rent to landlords who didn't agree to a rent reduction, even though a majority of its stores remained open during lockdown. Superdrug asked for a cut of up to 75% on some rents.
The pharmacies pointed to reduced sales during the lockdown period, but landlords, including the BPF, have pointed the ownership of the companies. Boots is owned by U.S. giant Walgreens, which had more than $1B in cash reserves at the end of the last fiscal year. Superdrug is 75% owned by Li-Ka Shing, the Hong Kong investor with a net worth of $26B, according to Forbes, and 25% owned by Temasek, Singapore’s sovereign wealth fund, with $313B of assets.
Tesla, now the world’s most valuable carmaker by market capitalisation, with $8B of cash on its balance sheet, did not pay its last quarterly rent bill on a showroom it owns in Weybridge, Surrey.
Landlords have been unable to pursue normal legal channels to seek unpaid rent, with the government putting a freeze on tenant evictions and statutory demands for payment. While that has helped tenants who might be genuinely struggling, or facing aggressive landlords, it has offered well-capitalised tenants carte blanche to refuse to pay, giving them the whip hand in negotiations over potential rent cuts.
“Where tenant behaviour has been utterly outrageous, and where they have sought to take advantage of the landlord’s position, is where they have been solvent, where they admit to being solvent and in many cases have substantial cash, but have still withheld rent,” Prestbury Chairman Nick Leslau said on a Bisnow webinar.
“The government needs to address the ‘can pay, won’t pay’ tenants who have been affected by COVID to a certain extent, but when you look at their balance sheet, when you look at their business plan, the scale of their revenues, they absolutely could pay their rent,” Brockton Everlast founding partner David Marks said on the same webinar. “The government should make it clear that they should pay their rent. Tinkering too much with UK contract law makes the UK less attractive to overseas investors, which will hinder economic recovery.”
LondonMetric is Tesla’s landlord in Weybridge.
“There is massive disappointment that some large, well-capitalised retailers, who clearly can pay, are deciding not to,” chief executive Andrew Jones told Estates Gazette. “While we recognise this has been a challenging time, that is not their prerogative and we have a legally binding contract which we will enforce. We simply cannot transfer value from our shareholders to theirs without due compensation.”
But from the point of view of the tenant, things are not so black and white.
“A retailer might be making money online, but income from their stores is currently low,” said Harper Denis Hobbs Head of Retail Consultancy Jonathan De Mello, a tenant specialist. “From their perspective, just because they are making money elsewhere doesn’t mean they shouldn’t ask for cuts on the cost of stores. They don’t think one part of the business should have to subsidise another, the two businesses will often have separate profit and loss centres.”
He added there is a second consideration. For some years, successful retailers like Next or Primark have been asking for rent cuts to bring their property costs in line with other retailers who have been offered concessions by landlords because they are struggling. There is a feeling that this is inherently unfair.
“Why should their competitors benefit from lower rents, and why should they suffer and be penalised for having a successful brand?” De Mello said.
Apple would fall into that category as well.
Ultimately, a brand like Apple is likely to get its way with landlords, because it now has an outsized influence in the retail world. If a landlord doesn't agree to a rent cut and Apple walked away, not only would a landlord be left with a large vacant store to fill, other retailers would likely follow Apple out the door.
“Along with companies like Next and Primark, Apple are one of the few retail anchors left today,” De Mello said. “It drives massive footfall and turnover for a retail destination. Other retailers would leave if they were not there.”
As long as COVID-19 remains an issue, and in the UK, tenants have the ability to withhold rents, tense conversations between landlords and tenants will continue, in spite of how good the balance sheet of either side might look.