A little while ago I completed a cross-country comparison of retail regulation for a client in the Middle East.

The countries involved were the UAE, Australia, France, the US and Canada.Australia came out really well or really poorly, depending on whether you are pro or anti-regulation.

Regulation in some form is a necessary evil in every industry because markets don’t work perfectly by themselves.The retail industry is no exception and the origins of retail regulation go way back. Sometimes though, regulation is politically motivated.

It is introduced not because of market failure but because of the very opposite – markets are working too well.In 1635, for example, Spanish barbers petitioned the government of Mexico City to ban Chinese barbers from having shops in the Plaza Mayor, prime real estate in the centre of town.

The reason for the petition was that the Chinese were willing to pay higher rents and accept lower profits to be close to their customers.

Worse, they were prepared to work longer hours than the Spanish and had more advanced skills, which even extended to preventive dentistry.

For the laid back Spanish, this would just never do.And they got their way – not only did the government banish the Chinese barbers from the Plaza Mayor, it even limited the number of razors they could have in their stores on the periphery.

By restricting the number of razors they could also restrict the number of employees in each shop and the size to which the shops could grow.

A clear win for “command and control” regulation. And for the Spanish barbers too, if not for their reluctant customers.

The centuries roll on, but the regulators have lost none of their mojo.

Any retailer in Australia who wants to try his luck somewhere else might do worse than to give Dubai a shot.Dubai, shopping hub of the Middle East, has perhaps the highest density of ‘trophy’ shopping centre space per capita than just about anywhere in the world.

But it’s also a place where, even if all your other friends desert you, the regulator never will.For example, there is this little doozy.

Article (25) of Law No. 33 of 2008 states, and I paraphrase, that a landlord can demand eviction of a tenant upon expiry of a lease in the following four cases:

(a) the owner wants to demolish the property, or

(b) the property requires renovation or maintenance that cannot occur while the tenant is on the property, or

(c) the owner wants to recover the property for his own personal use, or

(d) the owner wishes to sell the property.Note that there is no provision for an owner simply wanting to get in a new tenant because it might be more appealing to customers.
Or because the lease has expired.

If he tries to enforce the terms of the lease the landlord will likely be hauled before a ‘Rent Committee’, which adjudicates tenant-landlord disputes and will invariably grant the tenant an automatic one-two year extension.Another feature of the retailer-tenant relationship in Dubai that retailers like is that rental increases are handed down by government writ each year for all property types.

This is the infamous “Rent Cap Decree” that has frozen rental increases in some Dubai retail properties for years at a time.While the Dubai tenancy laws are somewhat rooted in tradition, one would expect regulation of the industry in a countries like the US, Canada, and Australia to reflect greater confidence in markets and in the value of private contracts.

This appears to be the case in the US and Canada, but much less so in Australia. (France, the other country I looked at, has its own idiosyncracies that gum up the market, but I won’t go there right now.)Overall, the US and Canada (which follow each other closely with respect to regulation) are considered by industry insiders with whom I spoke in Europe, the Middle East, North America and Australia to have the most enlightened systems of retail governance.

The key reason is a belief in (a) the centrality of the lease to the tenant-landlord relationship; (b) the legal enforceability of the terms of that lease; (c) recognition of the right of landlords to manage retail space in a manner that maximizes the value of a centre, and; (d) the belief that rental increases should be tied to the market and to economic conditions rather than regulatory writ.

For international best practice in the composition of a retail lease the reader can consult a publication entitled ‘Shopping Center Study Lease’ put out by the International Council of Shopping Centers (ICSC).

Australia falls somewhere in between North America and the Middle East.

The regulatory regime is widely viewed as heavy-handed and inconsistent across states, a situation that creates nothing less than a Disneyesque playground for consultants and lawyers who thrive wherever there is complex regulation.

Fortunately, some Australian governments are slowly getting the idea that regulation can hurt the people it is intended to protect and that usually less is more.

The Victorian government, for example, is keen on cutting red tape and has taken some baby steps in the right direction, such as its recent repeal of Section 25 of the Retail Leases Act that cost a million bucks a year to operate and helped no one.

It’s a hopeful sign that the attitude toward regulation in Australia could be moving from “markets fail” to “markets often work if they are allowed to”.

Michael Baker is principal of Baker Consulting and can be reached at michael@mbaker-retail.com and www.mbaker-retail.com.

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