By Ryan Smale, Real Estate Solicitor At Irwin Mitchell
It has been widely discussed that the current COVID crisis has accelerated the shift to online retail and that after the crisis shoppers are unlikely to return to retail destinations in the same numbers as before. Many retailers who were struggling to pay rent before the crisis will surrender (or forfeit) their leases and landlords could be left with swathes of empty stores. Unsurprisingly, retailers are demanding new terms from their landlords, who can feel the winds of change. According to a survey by Colliers, almost 80 per cent of retail property landlords expect the pandemic to bring permanent changes to the terms on which shops are occupied.
Retail property leases of the future will need to take into account the changing face of the high-street and the nature of each tenant’s business. Shopping centres may no longer be packed on Saturday mornings with consumers ready to ‘shop until they drop’. The average shopping centre is already a more balanced mix of retailers, coffee shops, cinemas, cafes, salons and showrooms. Consumers trends indicate more shopping online supplemented with trips to the shops for inspiration and for sizing. All this has led to calls for a more balanced, data driven method to calculate rent- one that will incentivise landlords to draw the customers into their destinations and ensure that tenants can survive during economic downturns.
If the terms are changing, then what will they look like?
Many commentators believe this could very well lead to the emergence of a data driven, turnover rent, calculated, not just by physical sales in store, but by considering other metrics such as online collections, footfall both in store and the shopping centre and the average time spent in store. A turnover rent would give both parties a vested interest in the success of a store. The inclusion of other metrics will encourage further collaboration between landlord and tenant.
Technology and data
At last, there is now an opportunity for “PropTech” to take a leading role. Tech savvy landlords are now able to monitor how many customers are in their shopping centres, how long they stay and when the centre is at its busiest. Tenants are now able to collect further data such as:
• Footfall in store
• Average time spent in the store per customer
• In store turnover
• In store collections (Click & Collect)
One-size fits all?
With a data driven turnover rent, there is no one-size fits all model. Different retailers use their stores for different purposes and so the metrics used to calculate rent would need to be appropriate. If the store was a showroom used to drive online sales such as a Nespresso or Microsoft store, you would want to use different metrics to a traditional retailer such as H&M or Primark.
Barriers to data entry
Previously, the parties have been reluctant to share their data with one another. If the popularity of one shopping centre is falling due to the emergence of a competitor on the other side of town, the landlord will not want to make the tenant explicitly aware of that. Equally, there has always been suspicion that the turnover figures provided by tenants have been artificially lowered. Consideration also needs to be given to the collection and use of data. Shoppers will demand that all their data is anonymised, and any collection of data will have to comply with the General Data Protection Regulations.
The creation of a code for data transparency in commercial property, in the form of a RICS Professional Statement would be essential – it would provide best practice in the management of this data. It could place mandatory obligations on regulated firms engaging in this area and give the parties’ confidence that the data provided is correct.
And the Legals?
For lawyers it will be essential to ensure that any data driven turnover rent provisions are clear, concise and do not leave room for manoeuvre.
A typical turnover rent is drafted on an 80/20 basis; with the tenant paying a base rent equivalent to 80% of market rent plus a percentage of the turnover generated in store, which is designed to fill the 20% shortfall.
A data driven turnover rent would see the base rent fall with a mixture of footfall, time spent in store and turnover filling the shortfall.
It is worth noting that a landlord will always want to include the following in the tenant’s turnover:
• In-store sales
• Click and collect sales
• The sale of gift cards
And a tenant will always want to exclude the following:
• Fees payable to credit card companies for processing transactions
• Staff discounts
As we emerge from the crisis caused by COVID-19, it will be apparent that the traditional retail landscape is changing rapidly and the terms of future arrangements between landlords and tenants will need to reflect this. Shops are increasingly becoming showrooms and data is enabling the industry to price units in a different way. Through the use of data, and more specifically through employing a data driven turnover rent, a partnership can be forged between landlords and tenants which will lead to more desirable retail destinations for all.
This article first appeared in CoStar