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On Trend Retail Lettings

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Eversheds Sutherland property column: July 2019

With nothing but doom and gloom making the news about the high street and retailers of all sorts seeking company voluntary arrangements, one could be forgiven for thinking that there was not a retail letting to be done. But that just is not the case, with plenty of retail and restaurant lettings keeping our team busy with increasingly intricate deals. It is true though that retail leases are changing, evolving as they must to suit the demands of strong retailers who are precious tenants. Heads of terms are ever more bespoke, and very few retail leases completed these days are on straightforward, traditional terms.

The future of the retail property world is highly likely to be a partnership between landlords and tenants. With us all being "clicks and mortar" customers now, the focus is on the store as brand showcase, with service and customer experience in the real world seen as a way of enhancing the consumer’s experience of the brand. There is a very definite "halo" effect that a successful store can generate, for both the retailer (in the form of increased online sales in the area) and the landlord (increasing footfall and dwell time to the benefit of all the stores and restaurants within a scheme). Landlords of successful destinations appreciate that customer facilities and family events draw people to physical shops. That might mean higher marketing costs and greater service charge budgets, but to the benefit of trading and turnover.

In keeping with the theme of partnership between landlord and tenant, rents are more often than not wholly or partly based on turnover generated at the store; something more akin to outlet-style turnover leases than traditional retail leases. To keep up with the changing world of shopping, retail leases now have to contain legal mechanisms to capture the value of a multi-channel store, going beyond the traditional rental model. We are also just beginning to see rents payable based on the net profit, rather than gross turnover, achieved by a store or leisure operator, in the same way one might see with hotels or services offices.

The permutations of turnover rent payable are seemingly never-ending. Examples include a turnover-based top up paid in addition to a base rent, a rent based solely on turnover figures, and base rents and turnover rents that ratchet up each year to a percentage of the total rent payable previously. There are quarterly reconciliations, annual reconciliations and provisions to top up, refund or smooth out the effect of Christmas trade. Intricate drafting now often takes account of a recalculation of any turnover percentage should the lease be assigned, and turnover rents are no longer restricted to the original trading tenant only. There now might also be recalculation should the tenant change the brand it trades at the store, as recognition of the fact that some retailers own several brands. And what makes up the turnover is still up for debate each time, with the increase in "click and collect", "serial returners" and in-store ordering.

Even the actual demise of a retail store is changing. With real-life shopping more about the experience, the trend is towards "permeable" stores. A clothes store flowing seamlessly into a coffee shop, a sportswear retailer seamlessly merging with a high fashion brand. The demises under these leases are not defined by walls and doors, but by changing floor surfaces and décor, with division by after-hours security shutters. So, the very definition of the traditional demise, with reference to "plaster surfaces of internal walls" and the like, is evolving.

Then the layout of stores is changing too, with the need for larger areas for immediate accessible storage for all those click and collect items. A remote store for stock is one thing, but storage within the store is in high demand too. Store fronts and signage, being a reflection of a nationwide and online presence, are more often under the total control of the retailer so long as they reflect national branding. However, with the increase in mixed-use developments, landlords are in turn looking to control the look and presentation of a scheme in order to avoid a detrimental impact on the value of residential and office elements.

The traditional reservation of a landlord’s right to enter a store to inspect or carry out works is also changing. No longer must the landlord not exercise that right just during the Christmas period, but from "Black Friday" to the end of the January sale, or perhaps the week either side of Easter, or even during the local school summer holidays.

With so many shoppers online, even as they shop "IRL", scheme-wide policies to regulate and support free Wi-Fi for customers are an essential part of property management. The data that can be harvested from a centre app is a huge and potentially valuable resource to both owner and retailers; tracking shoppers around a centre, monitoring dwell time and pedestrian flow. Lease provisions allowing for the mutual sharing of such data and the advertising opportunities that it brings are increasingly the subject of extensive negotiation in retail lease drafting. This is the most recent sign of evolution of retail letting documents to accommodate the retail revolution.

While the retail market has had more than its fair share of downs in recent years, it is a rapidly changing area and an interesting sector to work in. The current conditions are driving more of a partnership approach between landlords and tenants, and it is those that choose to embrace this that will thrive in the coming years.


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