It is no secret that the times are tough on the high street for many retailers. Online sales accounted for nearly 20% of sales in November 2017 and the devaluation of sterling has led to an increase in costs in many supply chains. Meanwhile consumers have switched from spending on clothes to spending on leisure pursuits and rises in business rates and the Living Wage and consumer fear of an increase in interest rates have all contributed to woes on the High Street.
However, despite these issues, bricks and mortar still have an important role to play. Shops remain vital for brand recognition, show-rooming and for those customers that still want to try the product before purchasing.
Retailers are therefore becoming more innovative in the way that they use and adapt their available space which is providing opportunities and potential pit falls.
Shops within Shops
Aggressive acquisition strategies in the past and a change in shopping habits have left some supermarkets with surplus space. This provides an opportunity to introduce unrelated retailers into their stores and thereby increase revenue through the rent received and attract greater footfall as a shopping destination. It is now becoming relatively common to find a Dorothy Perkins store within a Tesco superstore or an Argos outlet within a Sainsburys supermarket or even a car hire firm in the car park. In time, these sites may develop into mini shopping centres within a supermarket.
Retailers and supermarket operators will need to consider whether the incoming retailer will be offered a “shop within a shop” operated independently of the supermarket itself and fixed in location and size, or whether the retailer will be granted space for a concession more akin to a department store. Whichever route is chosen advisors need to think carefully about whether a lease or a concession agreement should be granted. The labelling of the document will not be conclusive and parties need to be careful not to confer security of tenure under the Landlord and Tenant Act 1954 where this is not intended.
If it is decided that a lease is the way forward it is likely that a traditional lease will need to be adapted. There will be issues to think about such as protection of the landlord and the tenant’s brands, shared costs of utilities and rates, service charge apportionment, security and staffing. The lease may end up including provisions more commonly found in a concession agreement.
Retailers may want to dip their toe in this market with one or two trial stores. Parties should consider whether a framework agreement can be agreed which will allow the roll out of the concept if the trial period is successful.
Concession agreements on out of town retail parks
Like supermarket operators, retailers may find that they have more space than is necessary on out of town retail parks. We are increasingly seeing interest in this space from other businesses such as coffee shops and creches.
When taking large warehouse type space retailers ought to think about their future business needs and ensure that the leases provide sufficiently flexibility to keep up with market trends. The most obvious clause to consider will be the alienation clause which should give the tenant flexibility to grant concession agreements or to underlet part. However, this alone will be of no use if the user provisions are not drafted widely enough, if the alteration provisions do not enable the tenant to reconfigure the space, if the planning provisions do not enable the tenant to apply for planning consent for any required change of use or if the signage provisions will not give the concessionaire the required level of prominence on the exterior of the building.
From a landlord’s perspective, check for any potential breaches of exclusivity arrangements agreed with other tenants and any planning restrictions on the retail park before agreeing to give the tenant such flexibility.
Turnover provisions are relatively common in shopping centre leases. There are various types ranging from deals where the rent is based purely on a tenant’s turnover to deals where the landlord is guaranteed a minimum level of rent but also shares in the retailer’s success by providing for a turnover top up payment. These provisions may entice a retailer to invest in a property by sharing some of the risk and reward with the landlord.
Most retailers now provide click and collect services from their stores. These assist with online sales but also help to increase footfall within shops. However, the growth in click and collect sales has created drafting issues which need to be considered when agreeing turnover provisions.
Should the turnover generated from these sales form part of turnover taken into account when calculating the turnover rent? From a landlord’s perspective, the store is being used by the tenant to generate income so they are likely to want the sales to be included when the turnover rent is calculated. From a tenant’s perspective, these are online sales with the store no more than a convenient pick up point – the sale may not be credited to the store within the company’s accounting systems. As such a tenant will want click and collect sales excluded from the turnover rent calculation.
What if the customer orders online from a tablet operated by the store and the order is fulfilled from stock held at the store? It seems fair that such sales do form part of the turnover rent calculation. What if the customer tries something on at the store and then orders online via their own phone and collects in store? The lines can become blurred and, once a commercial decision has been reached as to what should and shouldn’t be included within turnover, careful drafting is required to deal with the possible scenarios.