Hong Kong’s notoriously landlord-friendly leases make it hard to renegotiate terms during an economic
downturn, tying many tenants into leases well above market values. The territory’s high rents, added to
24 months of declining retail sales, have left retailers in Hong Kong feeling the chill.
Many tenants may wish to look beyond their contractual rights and obligations to find a commercial
solution. In such difficult circumstances, there are six options retailers could consider.
1. Rent restructure
Landlords are well aware of the tough retail market conditions
facing their tenants and may be open to discussions of
the terms of a lease, as they are likely to prefer keeping a
reputable tenant for a lesser rent over being left with an
empty store. Before approaching the landlord, though, tenants
must have a strong understanding of their lease terms and
their restructuring proposals, using corroborating data about
current rents and market conditions to strengthen their
position.
A tenant who believes the long-term outlook of the retail
market is positive may negotiate for lower rent with increases
when the market has recovered. An alternative is to trade a
lower rent for a longer lease term.
2. Assignment or subletting
A tenant may also propose assigning or subletting the lease,
either in whole or in part. Retail leases generally do not allow
this, and landlords will be reluctant to accept lower income
or a lesser tenant. This option, therefore, depends on careful
negotiation and the good performance of any proposed
alternative tenant.
3. Relocation
Relocating also depends upon the willingness of the landlord
to cooperate, as well as the availability of alternative premises.
The landlord may be keen to keep the tenant, even if this
involves relocation that gives the tenant the chance to
“right size” in a proper (and cheaper) location.
4. Buyout / surrender
Tenants may also offer the landlord a
buyout to terminate the lease early.
Factors such as additional leases with
the same landlord can be used as
leverage, as well as the likelihood of any
future deals with the landlord.
5. Goind dark
Most leases require tenants to keep
their premises open during specified
business hours throughout the year, but
tenants may propose “going dark” −
closing the store but continuing to pay
rent. This would result in substantial
savings for the tenant through reduced
running costs while maintaining income
for the landlord. Another strategy
involves partial surrenders, and
therefore reduced rent, including using
less space by boarding up part of the
shop.
6. Default and bankruptcy
In extreme cases, a tenant may choose
to default and let the landlord claim
damages. Under common law, the
general position is that damages are
calculated to reinstate injured parties
to the position they would have
enjoyed had the contract been properly
performed and to compensate for
any losses. Any losses claimed must
have been mitigated as far as possible,
and the court will take mitigation into
account when assessing damages.
Some retailers establish multiple entities
so each particular store is separated
from all other assets and liabilities.
This gives them the option to let any
one particular tenant go bankrupt if
need be, giving the landlord no viable
means of securing rent. But unless this
type of structuring was set up prior to
entering into the lease, the landlord
may be able to sue the tenant’s parent
company to claw back losses under
certain circumstances. This option is
also not viable if the lease is guaranteed
by either a parent company or any
other affiliate of substance. There are,
of course, also potential reputational
ramifications in choosing this route.
Riding out the storm
Several big-brand retailers have
recently been successful in renegotiating
their rents. A large jewellery retailer
closed part of one of its stores on the
understanding it would open an extra
store at another of that landlord’s
properties. Coach and Tag Heuer
closed flagship stores in 2015, and
Abercrombie & Fitch shut its store in
the Central district earlier this year.
Burberry, Chow Tai Fook, Gucci,
Kering and Prada have also looked to
renegotiate their rents, according to
media reports.
While examples of successful
negotiations are encouraging, tenants
should be aware that landlords may
not accept an economic downturn as
justification if adverse conditions were
already apparent when the lease was
signed – for instance, within the past
two years.
The big thaw
The continued depreciation of the
Chinese yuan means the years of
frenzied shopping by Mainland tourists
look unlikely to return. Hong Kong,
however, has retained its appeal
to cross-border retailers, with
73 international brands entering the
market in 2015.
There are signs of recovery, too.
Monthly retail sales ended their two-year
slide in March, rising for the first time
since February 2015. After a few stormy
years, the silver lining is a more balanced
retail landscape and a more diverse retail
offering, as lower rents make prime
shopping areas accessible once again to
local retailers, fast-fashion brands and
lifestyle stores.