John Lewis is threatening to withhold up to 20% of the service charges it owes to some of its shopping centre landlords, in protest at “unacceptable” increases in annual service charges over the last few years.
Service charge payments cover non-rent items, such as heating, security, maintenance, marketing and staffing. John Lewis, which has about 20 stores in covered shopping centres, said it had resorted to the action to try to get its landlords to help stop the service charge increases.
“At a time when we are doing everything we can to reduce our cost base, we have unfortunately been faced with regular increases to the service charges we pay for some of our shops in shopping centres,” John Lewis said in a statement.
“Over the last three years we have seen an increase in service charges of 20% and these continued increases are simply not acceptable, particularly in the absence of strenuous efforts by landlords to work collaboratively with us to reduce these costs.”
John Lewis wants landlords to take on some of the service charges during the fourth quarter, the run-up to Christmas and most critical period of the year for retailers.
The retailer’s squeeze on landlords comes just three weeks after the John Lewis Group – the department stores and the Waitrose supermarket chain – slumped to its first-ever half-year loss of £26m, with the department stores performing worst, sliding £62m into the red.
On Monday, the group announced it was merging the management of the department stores and Waitrose, in a move that will mean the loss of 75 senior management jobs – including the managing director of Waitrose – and save £100m.
A large number of rivals have run into serious financial problems, including House of Fraser, Debenhams, Philip Green’s Arcadia TopShop group, New Look and Monsoon. Many have been through a legal procedure linked to insolvency to force through rent cuts. However, those arrangements are being criticised as unfair by retailers such as Next, which is still paying full rent.
John Lewis’s decision to threaten to withhold payments was first reported by the BBC.
The department store chain is contractually bound to pay the service charge under the terms of lease arrangements with landlords, and withholding payments could lead to legal action by property owners to recover unpaid bills. John Lewis’s biggest landlords include Hammerson and Intu.
Hammerson centres with John Lewis outlets include Birmingham’s Grand Central, Brent Cross in north London and Highcross in Leicester. Intu has John Lewis stores in the Manchester Trafford Centre, at Cribbs Causeway in Bristol and the St David’s centre in Cardiff.
Legal experts believe the dire state of the high street gives John Lewis a strong hand in negotiations as landlords cannot threaten the company with repossession.
“This is a very unusual move but it is reflective of John Lewis’s position in a challenging retail market,” said Richard Cressall, partner and commercial property expert at law firm Gordons.
“Pretty much no other tenant would be in a position to take John Lewis’s anchor stores at shopping centres in this market or to create the footfall they do, which all but rules out the most severe potential remedy, repossession.”
Cressall says landlords are likely to come to the negotiating table rather than face costly, lengthy court action.
“Those landlords who do persevere [with legal action] should succeed, but in this market I think at least some landlords will choose to do a deal rather than fight in court, which must be what John Lewis is hoping for,” he says.
John Lewis said: “We are investing more in our current shop estate than ever before to do everything we can to encourage customers to grow footfall to our shops and we hope that our landlords will support us in continuing to do this.”
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