There’s no doubt that the changes we’re seeing in how people shop, the continued rise of ecommerce and the upheaval caused by Covid-19 are all creating a lasting impact on the UK’s retail sector.
We keep hearing that the industry must adapt in order to tackle these changes, but what does this mean for the retailer and landlord relationship and the traditional lease structures that many of us have been familiar with for years?
It might be hard to cast your mind back, but even before Covid-19 struck, the theme of turnover based leases was becoming increasingly prominent and has only been exacerbated by the widespread store closures during the pandemic.
At Savills we recently conducted a nationwide survey to investigate the impact that Covid-19 has had on retail and leisure leases, and found that of the retailers surveyed, 82 per cent will be looking to re-gear some existing leases to incorporate a turnover rent provision in the future.
However, of the landlords we spoke to, 74 per cent see current rent negotiations as being short-term solutions rather than a permanent fixture, suggesting that there are still a lot of conversations to be had on what might be the ideal outcome for both parties going forwards.
It’s easy to see why a move to a turnover based lease is by no means a simple solution. For retailers there are clear benefits. It allows greater control over property costs in relation to sales, removes an upward-only rent review provision and preserves an economic operating model.
However, there are significant limitations for landlords. There’s the obvious lack of security when it comes to income, as well as the reliance upon retailers sharing transactional data and trading figures. Furthermore, we are met with a whole host of other factors when it comes to how to account for ecommerce and click and collect sales, lack of transparency when it comes to returns, and issues obtaining accurate turnover projections provided by retailers ahead of new lettings.
It is also widely thought that turnover leases need to include a proportion of online sales generated from a store’s catchment, although a huge question remains as to how that is defined.
Therefore, in spite of the growing interest in turnover rents, it’s perhaps unsurprising that landlords only expect them to account for 7 per cent of lease negotiations by the end of the year (according to our survey), with rent free windows and rent reductions more likely.
What this shows is that, ultimately, there is still a lot of work to be done in finding lease structures that work for both retailers and landlords.
However, what our survey did find was that both parties acknowledge the need to work together in a partnership and that neither retailer nor landlord should bear the brunt of the financial burden caused by Covid-19.
Never before has an event had such an impact on both landlords and tenants, and the age old reluctance to compromise and have transparent conversations must end if any solution is to be reached.
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