The need for alternative rental structures in retail

Tough trading conditions on the high street have led several major retailers to seek rent cuts or turnover-based rents from their landlords. 

Monsoon Accessorize, H&M and Primark are amongst those hitting the headlines for entering into these discussions.

There is an acknowledgment across a significant part of the market – including occupiers and landlords – that rents do need to be rebalanced in light of recent trends.

At a time when the pace of change in retail is matched by potentially significant political change, now is a good time to consider whether there are alternatives to typical lease and rental structures.

Learning to collaborate

Retailers are being driven to be more flexible generally in their business, so it's fair to say their leases and terms of payment should be capable of flexibility too.

Greater collaboration between landlords and retailers will be essential to finding a new model that works for the modern retail community. This could see ideas like joint lobbying for a long overdue review of business rates, or the appropriate sharing of data on a store-by-store basis.

The value of data lies in the information a retailer typically gathers on its customers and their shopping habits – which could help a landlord or local authority develop a more effective retail location strategy – and financial data, which could help to influence the more widespread use of turnover-based rents.

The impact of CVAs

Rent reductions are the next stage towards rebalancing rents following the recent spate of retail CVAs and will ultimately work their way through the market through rent reviews, re-gears and renewals.

A "healthy" operator shouldn't necessarily pay higher rents and be punished for strong performance. It is for successful tenants to use their market prominence and financial stability to get better deals on a fixed or financially linked basis. They have the opportunity to do that on every new acquisition, relocation, lease regear or renewal.

The rent reductions that accompanied the recent CVAs have given many solvent tenants an appetite for seeking their own, on the basis of a direct rental comparison. While this is a bitter pill for landlords to swallow, this is not a surprise as such a rebalancing is a natural consequence when landlords have approved a CVA.

In circumstances where some retail locations are suffering from what is now an over-supply of retail space, it is natural that retailers in those locations are seeking to extract a lower rent.

Rent is such a significant outgoing that delivering savings in this area can be key to ensuring the ongoing viability of a retail business as part of its wider remodelling.

Turnover-based rent

The benefits of a rent linked to revenue are clear for the tenant. Provided they are well advised on the percentage they are able to share with the landlord, they are only paying rent once a level of income is achieved that delivers an acceptable return at that location.

This is not a new phenomenon and a turnover based rental model is widely adopted across factory outlet locations and a number of major retail destinations in a variety of forms.

The expectation is that this will then result in more sustainable retail businesses, delivering less void units and a more reliable rental yield for landlords. However, the lack of certainty of income is an issue for many landlords, so this is likely to be more keenly adopted in well-established retail schemes and when dealing with retailers with a strong balance sheet.

Many retailers are also reluctant to share financial data across their store estate for fear of this being used against them by landlords in negotiations at other locations. Retail industry bodies such as REVO are driving an agenda for greater sharing of data between landlords and tenants as a recognition of the partnership needed to ensure that the retail landscape is adaptable, relevant and fit for purpose.

Date published

17 September 2019


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