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Are turnover-based rents the future in UK retail? – RETAIL VIEWS AND NEWS

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My last post of 2020 eschews the predictable scrutiny of the retail sector over the past year or the trap of predicting what might happen in retail in 2021. Instead, I return to a subject increasingly raised in debates and discussions on the future commercial relationship between owners of retail businesses and their tenants, which are rents based on turnover.

Landlords can usually give up the lease by peaceful reentry if the rent is not paid within 14 or 21 days. However, government support for businesses during this COVID-19 crisis included a moratorium on the ability of retail owners to take any action in the event of non-payment of rent. This temporary protection for retail tenants began in March 2020 (due to the national COVID-19 lockdown) and was initially in place for three months but has just been extended for a fourth time until the end of March 2021.

Unsurprisingly, these continuing extensions have been criticized by both the British Property Federation and other homeowner groups, as they believe it only pushes forward a growing backlog of late rent payments, which which is sure to pose problems when this moratorium finally ends.

However, beyond that, it has been clear for some time that retail owners and tenants need to move away from the traditional business relationship of quarterly rent payments and regular only upward revisions. The well-documented challenges facing ‘brick and mortar’ stores, which have been exacerbated over the past nine months by the impact of COVID-19, have highlighted landlord-tenant relationships and lease obligations and have captured the attention of retail and property. sectors on better ways of working in the future.

The business landscape has irrevocably changed, but fundamentally the way the commercial real estate industry approaches rents and leases has not changed. This historic rental system no longer works for either party and needs fundamental reform which must be led by industry, but also requires the government to put in place the appropriate legislative framework afterwards.

While landlords will still want fixed rate leases, today’s commercial real estate market, with declining occupancy rates, and traders resorting to CVAs, then looking to reduce their portfolios and mortgage obligations. rent and rate, means that homeowners now have few options but to compromise.

Many believe that turnover-based rents (already quite common in some European markets) are the best solution for the future of the retail and leisure sectors. In the UK, several national brands of retailers, such as New Look, All Saints, Clarks and Anne Summers have already started or are considering moving many of their remaining stores to this more flexible and two-way model.

Some have also argued that a more equitable solution would be a rent based on the margin. Since margins vary widely in the retail industry, this may be a fairer approach for each type of retailer, regardless of what products they sell.

There is another ‘hybrid’ model that offers the landlord a certain level of income security and therefore may start to become more popular, namely that retail tenants pay base rent, but top-up based on figure. business.

Regardless of the precise details agreed upon, turnover-based rents create an interconnecting relationship between the owner and the tenant of the retail business, because in the right periods both parties benefit, but under conditions. less favorable trade, both are encouraged to seek improvements. They appear, in whatever form, to be a realistic path after COVID-19 avoiding the destructive tensions that have plagued many retailers and their owners in recent years.

For owners of shopping malls or retail parks, this gives them a real demand to consider the broader customer experience and the ways in which they can increase attendance levels and stay times and to consider innovations. that benefit their tenants and retail buyers.

However, turnover rents are not an entirely straightforward alternative to market based rent reviews in the UK only, as the terms agreed will almost always be specific to the retailer, sub-sector or company. ‘site.

The real challenge of course is transparency and while many retailers are now keen to share their sales details with their owners, revealing full income statement numbers is probably a whole different matter! Obviously, the tenant must be sure that the information provided as part of the rental agreement remains confidential and never falls into the hands of competitors.

Another important factor is the quality of the data and a further complication of sales based rents is the way a sale is attributed to a store and more work needs to be done to measure this accurately and consistently. Many retail brands now have a significant share of online sales, but of course they also use stores for showrooming, click & collect, online order returns, etc. True “omnichannel” retailers leverage their online channel to support their physical stores, and vice versa.

Even where revenue rents are already in place, the transparency of multi-channel sales remains limited due to the difficulty in establishing the exact value of an individual physical store in any e-commerce transaction. These challenges will have to be met, and quickly, so that the commercial relationship that has existed for decades between owners and their tenant traders can evolve into a real partnership approach, both for the benefit and the chances of survival of both parties in a trade sector which is both rapidly changing and unpredictable.

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