By Olivia Holden, 26th February 2020
The Future of the high street
The recent acquisition of Topshop by online retailer ASOS is yet a further blow for traditional high street retailers. Online giant ASOS has acquired the Topshop brand, together with Topman and Miss Selfridge from the Arcadia group for an estimated £295 million. In addition to the recent demise of Topshop, Debenhams (a further casualty of the rise of online shopping and the ongoing Covid-19 pandemic) recently ended its 242-year history on the high street after it was acquired by online retailer Boohoo for a reported £55 million. Notably, neither of the deals struck up by ASOS or Boohoo to save the struggling retailers included the physical shop stores themselves. In the last three years alone an estimated 45,000 shops have shut up shop for good leaving big holes to fill and boarded up shop units becoming a common sight on our high streets. There is no doubt that our local and national highstreets are going to look very different as we emerge from the Covid-19 pandemic, but a change is also afoot with retail leases as landlords and tenants are set to be encouraged to work together in order to save the high street. In addition to this, the loss of big brands from our high streets may also see independent retailers uniquely placed to benefit.
Consumer habits do continue to indicate that online shopping is the preferred option, with trips to physical shops being used for inspiration and browsing viewed as a leisure activity. Retailers such as John Lewis have sought to capitalise upon this by introducing interactive spaces in their stores together with a focus on customer experience. Re-purposing of space has become a much talked about topic as our high streets continue to evolve and adapt to changing consumer buying habits. Recent changes to planning law further reflect this in the most radical reforms to the English planning system since the second world war. The new 'Use Class E' means that businesses can adapt quickly to rapidly changing market conditions. A town centre shop can now change to a gym, and then to an office and back to a shop again without the need to obtain planning consent.
The rise of the turnover rent model
In a move towards greater equilibrium and risk sharing between landlords and tenants, we are also seeing an increased demand for shorter leases with the turnover rent model being used as opposed to long leases with a fixed rent subject to an upwards only open market rent review. Historically landlords have been reluctant to engage with a turnover rent model but retailers such as New Look and Allsaints have reportedly negotiated with their landlords to occupy their stores on a turnover rent basis only. The turnover rent model works by a landlord charging a fixed base rent equivalent to a percentage of the open market value with a 'top-up' payable by the tenant where turnover exceeds the base rent. Therefore, a proportion of the rent due to the landlord is linked to the success of the tenant trading at the property. The landlord has a vested interest in the success of a tenant and its profits, equally, both landlord and tenant share the burden of any hardships brought about by economic downturn.
The turnover rent model rent model provides much needed flexibility, but greater reporting requirements are also placed upon a tenant. A landlord can require a tenant to link its tills and turnover information directly to a landlord's system. It is often a contentious point of negotiation whether click and collect items and returned items are included within the definition of turnover generated from the premises. As we see more of a trend towards this model, tech savvy landlords are making the most of new ways of collecting data such as footfall and the average time consumers spend in a store. While a tenant may resist click and click items forming part of their revenue stream at a property if the item was ordered from outside the premises, in a pandemic environment this argument is likely to be met with resistance by landlords seeking to argue that it actually enhances a store offering. The outcome of negotiations will often depend on the bargaining power of the tenant. The only way in which a tenant can seek to protect themselves is by expressly excluding online sales from being included within the definition of turnover rent. in addition, a tenant should seek to exercise caution when registering a lease with turnover rent provisions at the Land Registry to avoid commercially sensitive and confidential data from being made publicly available. Legal guidance should be sought so that a redacted version of the lease is supplied and registered.
'Keep open' clauses during a pandemic - to trade or not to trade?
Should a turnover rent model be used the lease will most likely place an obligation on a tenant to maximise turnover. A landlord will expect a tenant to use reasonable or best endeavours to maximise profits and as part of this most leases of this type will contain a clause to maintain a window display and to remain open for an agreed number of hours, otherwise known as a 'keep open’ clause. As Covid-19 forced all but essential shops to close there was much debate back in March of last year as to whether a tenant would be held to be in breach of their lease if forced to close due a national lockdown or more recently, because of the tier system. Most leases contain a covenant to comply with statutory obligations which so far has been held to likely override the ‘keep open’ obligation and preclude a landlord from holding a tenant in breach of their lease. As Covid-19 continues to disrupt high street trading it is likely that we are going to see an increased tenant demand to ensure that they are released from a 'keep open' covenant if a shop is forced to close because footfall has dropped below a certain specified level meaning it is not viable to open, PPE is not available for staff or if the supply chain has broken down and no stock is available. In the alternative, a tenant may wish to trade outside of permitted hours to cater for NHS staff.
Tenants are also likely to be far more prudent when it comes to payment of service charge due to pandemic induced store closures and request that rent and service charge suspensions or deferments are drafted into their leases with measures applying if a store is unable to trade, or that cost savings are passed on. This may result in landlords moving away from service charge clauses altogether and opting for all-inclusive rents in order to crystalise their monthly or quarterly outgoings.
Current Government guidance
In light of the issues the pandemic has presented to the property sector, the government has published official non-statutory guidance which encourages landlords and tenants to work together during the ongoing pandemic. It is advised that tenants should continue to pay their rent and abide by all other terms of their lease to the best of their ability. While the government has presented a package of measures to assist those tenants who find themselves in financial difficulty some argue these measures do not go far enough. The Corona Virus Act 2020 has provided that landlords are currently unable to evict their tenants due to non-payment of rent, however, the eviction moratorium has already been extended twice and this critical lifeline is set not to be extended post 31 March 2021. This in turn will leave the courts with a backlog of possession claims brought by landlords for non-payment of rent to deal with.
Even if a tenant seeks to end their lease owing to financial difficulties, compliance with any yielding up obligations which may include remedial works to the property will still need to be considered. The pandemic has presented a further problem in this regard as tenants find themselves unable to contact contractors to carry out remediation works while in the interim seeking to prevent a landlord from serving a schedule of dilapidations. A tenant should be aware that it is not possible to unilaterally end their lease and simply 'shut up shop'. Legal advice should always be sought when seeking to end a tenancy and a Deed of Surrender entered into by both parties to document the terms of the surrender agreed by both parties to prevent costly disputes arising later on. Likewise, when seeking to exercise a break clause legal guidance is always advised.
The government has announced funding in the region of £8.6 billion for regeneration projects which will undoubtedly seek to resolve the issue of unlet vacant units in town centre locations. It remains an unknown as to how Covid-19 will affect our town centres in the long run, but it is without a doubt that the pandemic is causing a shake-up when it comes to the traditional landlord and tenant relationship. Some talk of a post pandemic shopping boom as we all rejoice and rush back out onto the high street, others are not so optimistic and believe that the high street has well and truly had its day. What is certain is that retail tenants, more so than ever are looking for increased flexibility and this has created new ways in which landlords and tenants seek to share the burden of risk. We may see a shift away from long leases with upwards only rent reviews for the foreseeable future with a preference for upwards/downwards rent reviews which are thought to truly reflect the state of the market or shorter lease terms adopting the turnover model with a monthly rather than quarterly rent and longer grace periods. While Philip Green has lost his crown as the King of the high street there are new opportunities presenting themselves to independent retailers who are uniquely placed to take advantage of rent-free incentives and shorter lease terms that are being offered by private and institutional landlords.
Get in touch
Should you wish to discuss your current lease or are thinking about entering into a new lease, please contact a member of Goughs Commercial team on 01249 475880 to discuss your options and to receive advice that is tailored to you and your unique requirements