May 11, 2020

Retail rents to be linked to turnover and footfall, says law firm Royds Withy King

Vicky Hernandez, a Partner in the Real Estate team at Royds Withy King and whose clients have included AllSaints, Ladbrokes, Moss Bros, The Body Shop and Arcadia Group, comments.

“Turnover rents are not new, having been used effectively by landlords and tenants in outlet villages and for short-term lets in shopping malls. They have been slow to take off across the wider retail sector because they create very real challenges around where gain and pain are shared.

“Landlords typically establish a base rent of around 80% of open market rental value, with the remaining 20% based on turnover. Whilst it is difficult to see landlords agreeing to lose that guaranteed rental income entirely, we can expect to see it perhaps drop to closer to 50% with the remainder of the rent based on sales.

“But the real challenge landlords and retail tenants face is around online sales. Retailers might understandably be reluctant for online sales to be used in determining rents when shoppers have no interaction with a store. Landlords, on the other hand, might feel put out if rents do not account for click and collect sales or the handling of returns in store.

“The answer rests in a much more open and honest relationship where retailers provide landlords access to detailed financial and footfall information – usually a daily sales report together with monthly audited reports.

“Another potential sticking point is around ‘keep open’ provisions designed to ensure a retailer remains open and trading to maximise the rents a landlord will receive. This is likely to cause tension should a retailer be forced to close following, for example, a secondary Covid-19 outbreak.

“Turnover rents do, however, offer both landlords and retailers some attractive benefits. Landlords will not want empty units and the associated costs and a unit let on a turnover rent will be considered by them as cost neutral. Retailer occupiers can use turnover rents for short term lets or to try out new retail experiences before making a long-term commitment.

“Turnover rents will increasingly look attractive but will continue to be challenging for both landlords and retailers.”

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