As described in Note 2.3, the classification of a lease agreement depends on the allocation of risk and rewards incidental to the ownership of the leased item. When assessing the classification of a lease agreement, certain estimates and assumptions need to be made and applied, which include, but are not limited to, the determination of the expected lease term and minimum lease payments, the assessment of the likelihood of exercising options and estimation of the fair value of the lease property.
Delhaize Group as Lessee - Finance and operating lease commitments
As detailed in Note 8, Delhaize Group operates a significant number of its stores under finance and operating lease arrangements. Various properties leased are (partially or fully) subleased to third parties, where the Group is therefore acting as a lessor (see further below). Lease terms (including reasonably certain renewal options) generally range from 1 to 40 years with renewal options ranging from 3 to 36 years.
The schedule below provides the future minimum lease payments, which have not been reduced by expected minimum sublease income of EUR 34 million, due over the term of non-cancellable subleases, as of December 31, 2011:
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Finance Leases
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|
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|
|
|
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Future minimum lease payments
|
139
|
127
|
121
|
116
|
107
|
915
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1 525
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|
Less amount representing interest
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|
|
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Present value of minimum lease payments
|
61
|
51
|
52
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54
|
50
|
482
|
750
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Of which related to closed store lease obligations
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3
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3
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3
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3
|
2
|
13
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27
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Operating Leases
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Future minimum lease payments (for non-cancellable leases)
|
317
|
275
|
248
|
215
|
185
|
907
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2 147
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Of which related to closed store lease obligations
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12
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11
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9
|
8
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6
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20
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66
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The average effective interest rate for finance leases was 11.8%, 12.0% and 11.8% at December 31, 2011, 2010 and 2009, respectively. The fair value of the Group’s finance lease obligations using an average market rate of 4.5% at December 31, 2011 was EUR 1 016 million (2010: 5.1%, EUR 994 million; 2009: 6.1%, EUR 887 million).
The Group’s obligation under finance leases is secured by the lessors’ title to the leased assets.
Rent payments, including scheduled rent increases, are recognized on a straight-line basis over the minimum lease term. Total rent expense under operating leases was EUR 311 million, EUR 295 million and EUR 270 million in 2011, 2010 and 2009, respectively, being included predominately in “Selling, general and administrative expenses.”
Certain lease agreements also include contingent rent requirements which are generally based on store sales and were insignificant in 2011, 2010 and 2009.
Sublease payments received and recognized into income for 2011, 2010 and 2009 were EUR 17 million, EUR 16 million and EUR 16 million, respectively.
Delhaize Group signed lease agreements for additional store facilities under construction at December 31, 2011. The corresponding lease terms as well as the renewal options generally range from 10 to 30 years. Total future minimum lease payments for these agreements relating to stores under construction were approximately EUR 71 million.
Provisions for EUR 46 million, EUR 44 million and EUR 54 million at December 31, 2011, 2010 and 2009, respectively, representing the discounted value of remaining lease payments, net of expected sublease income, for closed stores, were included in “Closed Store Provisions” (see Note 20.1). The discount rate is based on the incremental borrowing rate for debt with similar terms to the lease at the time of the store closing.
Delhaize Group as Lessor – Expected Finance and Operating Lease Income
As noted above, occasionally, Delhaize Group acts as a lessor for certain owned or leased property, mainly in connection with closed stores that have been sub-leased to other parties, retail units in Delhaize Group shopping centers or within a Delhaize Group store. Currently the Group did not enter into any lease arrangements with independent third party lessees that would qualify as finance leases. Rental income is included in “Other Operating Income” in the income statement.
The undiscounted expected future minimum lease payments to be received under non-cancellable operating leases as at December 31, 2011 can be summarized as follows:
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Future minimum lease payments to be received
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35
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30
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17
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5
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3
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16
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106
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Of which related to sub-lease agreements
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14
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10
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5
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2
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2
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1
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34
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The total amount of EUR 106 million represents expected future lease income to be recognized as such in the income statement and excludes expected future sub-lease payments to receive in relation to stores being part of the “Closed Store Provision” (see Note 20.1).
Contracts including contingent rent clauses are insignificant to the Group.