Inside Westfield’s Swathe Of Legal Battles With Tenants Over Unpaid Rent
The owners of London’s two most valuable shopping centres are involved in a legal battle with 11 retailers over rent that hasn’t been paid during the coronavirus pandemic, and the details of the cases shine a light on the tensions between landlords and retailers over the financial burden wrought by lockdowns.
Bisnow has reviewed legal documents relating to 16 separate legal actions filed against 11 retailers by the owners of the Westfield Stratford City and Westfield London shopping centres. The retailers include international names like Gap and Claire’s Accessories and Morphe cosmetics; internationally owned brands like Pret a Manger and Superdrug; and well-known UK names like Dune, Russell & Bromley and The Fragrance Shop.
Some cases lodged against retailers like Coach and shirtmaker Charles Tyrwhitt have been settled, and others, like the one against Moss Bros, ended when the retailer undertook a company voluntary arrangement and exited leases.
Westfield Stratford City is owned by a joint venture between Unibail-Rodamco-Westfield, Dutch pension fund APG and Canadian Pension fund CPPIB. Westfield London is owned by a joint venture between Unibail and German fund manager Commerz Real.
Altogether, High Court records show that the owners of the two centres filed papers for 52 separate legal actions against tenants, although not all of them are active. Where they are not currently active, it indicates cases have either been withdrawn or settled out of court, or the retailers subject to legal action have not yet acknowledged receipt of the claims against them.
The full list of retailers against which the centre owners have active claims is: Russell & Bromley, Geox, The Fragrance Store, Pret a Manger, Dune, Base Childrensware, Morphe, Claire’s Accessories, Superdrug and Gap. The mall owners and Boots have reached an agreement on rent and service charge, but there is still an active claim for unpaid interest and legal fees. Of the active cases, 10 relate to Westfield Stratford City, six to Westfield London.
In total, the centre owners are claiming about £5.5M in unpaid rent from retailers in cases that are still active. Cases that have been settled feature claims for unpaid rent totalling £4.5M.
The UK government has put in place moratoriums that mean landlords cannot evict commercial tenants for not paying rent, or use the courts to issue petitions to have companies wound up for not paying a debt. In normal circumstances these would be the legal measures a landlord could take against a tenant for not paying rent.
But there is no moratorium against using the courts to sue for damages relating to unpaid rent. Other landlords such as Criterion Capital are also using the High Court to pursue tenants for unpaid rent.
The details of the cases filed are a rare instance of daylight being thrown on what are normally confidential negotiations between landlords and tenants over rent payments.
The cases filed by the centre owners reviewed by Bisnow are all very similar, outlining that retailers had failed to pay some or all of the rent and service charge owed under the terms of a lease signed, plus interest that would have been earned if the rent had been paid.
But the defences filed by the retailers differ. Some, like the defence filed by Base Childrensware, argue they were not able to trade from their stores, the permitted use in the language of the lease, while nonessential retail was forced by the government to shut, and thus they did not have to pay rent for those periods when they couldn’t open. The Westfield Stratford City and Westfield London owners are claiming a combined £562K from Base.
Several other retailers go further in their defence and argue that their stores were in effect damaged and made unfit for use by the impact of Covid-19. They argue that the centre owners should be able to claim back from insurers any financial losses that came about as a result of this damage; and because they can claim the payment from their insurer, the terms of their lease say they shouldn’t have to pay rent. This argument has also been made in the U.S. under business interruption insurance coverage, but thus far, insurers have refused to pay, saying coverage policies require physical damage. Landlords have almost entirely been unsuccessful in even getting courts to hear cases attempting to force insurance companies to pay coverage for buildings sitting empty during the pandemic under government shutdowns.
The centre owners have filed a reply to this defence in some of the cases, arguing that the terms of their leases with retailers did not require them to insure against the impact of a global pandemic, but rather other factors that might cause centres or stores to close, such as earthquakes, lightning strikes, sprinkler leaks, terrorist attacks or riots. Because it was not required to insure against the effects of a pandemic under the lease terms, it can’t make an insurance claim and so the rent still has to be paid, the centre owners argued.
The defence of one tenant, perfume retailer The Fragrance Store, argued that it had been trying to find a consensual agreement with the centre owners, but a legal claim had been filed against it nonetheless.
“The Defendant has maintained that it is open to finding a resolution with the Claimant throughout these periods and has offered to move forward on an equitable basis by offering a turnover lease to the Claimant,” the defence said. “The Defendant’s property director has been in communication with the Claimant in this respect throughout.”
It alleges the claim was trying to circumvent the measures put in place by the Government to protect tenants and went against the voluntary code of conduct put in place to try and help landlords and tenants find solutions over unpaid rent.
“Those measures prevent forfeiture, winding up petitions and the CRAR procedure where rent arrears are related to Covid-19,” the defence said. “The measures are clearly intended to protect commercial tenants where they have been forced to close and/or have been subjected to significantly reduced footfall during any trading periods, as a result of social distancing measures. Using what is essentially a loophole goes behind the intention of those measures.”
The Fragrance Store also made the argument about insurance used by other retailers.
In a reply, the centre owners said they had been in discussion with The Fragrance Store but that they were under no obligation to accept the tenant’s proposal.
“Efforts to reach a commercial compromise were made by both parties and the breakdown in these discussions led to the commencement of this claim,” the landlords said.
On whether the centre owners were exploiting a loophole or going against the government’s code of practice, the reply said: “It is denied that the issue of this claim is against the code of practice or that the code of practice operates in such a way so as to require the Claimant to refrain from seeking the sums due to it. The Code of Practice for commercial property relationships during the Covid-19 pandemic referred to by the Defendant at paragraph 8 is a voluntary code and does not change the underlying legal relationship between the parties or the terms of the lease. Simply, it does not absolve the Defendant of its responsibilities and obligations under the Lease, which continue to apply in full force and effect.”
It added: “The moratorium is clear as to its scope and extent, had the government intended to prevent the lawful recovery of debt in respect of commercial tenants it would have done so.”
Full-year results for Unibail show that its UK and Italy division received £135M in rent in 2019, which fell 50% to £67M in 2020. Of that drop, 11 percentage points were a result of leases being renewed at lower levels, and 16 percentage points were a result of rent discounts extended due to Covid-19.
That means the legal claims active or settled by the company equate to about 7% of its UK and Italy rent. The company said it collected 74% of its UK retail rent in December last year, which puts it ahead of the 70% average collection rate across UK retail, data from Re-Leased showed.
Unibail’s overall net retail rental income for Europe, the UK and the U.S. in 2020 was £1.46B, down from £1.97B the year before.
Unibail declined to comment. Pret a Manger and Dune declined to comment. All the other retailers involved in various cases did not respond to a request for comment.