It was reported last month that H&M is offering landlords “total occupational deals”. In essence, the tenant offers the landlord a sum linked to the amount of sales the store makes. The landlord then decides how to divide it between rent, service charge and business rates. Meanwhile, last week news came of John Lewis’ threat to certain of its landlords to withhold 20% of this quarter’s service charge.
These are both examples of the pressure facing retailers in the continuing downturn on the UK high street.
Arguably, however, they point to a more fundamental shift in the relationship between retailers and landlords, as lease terms and previously accepted ‘norms’ evolve to keep pace with changes in consumer behaviour and the UK’s challenging retail landscape.
Other trends in the retail sphere over recent months corroborate a rebalancing of the increasingly tough retailer – landlord relationship.
One obvious development has been the increasing number of high-profile retailers resorting to company voluntary arrangements (‘CVAs’). A CVA, whilst not new, is a procedure implemented under the supervision of an insolvency practitioner with the stated purpose of enabling a business to continue to trade while coming to an arrangement with its unsecured creditors; a means of restructuring its debts. One typical consequence of such CVA restructuring deals, recently approved by creditors for Arcadia and Debenhams, is a restructuring of lease terms. These often include sizeable rent reductions or, in some instances, the closure of unprofitable stores.
But landlords and rival retailers have pushed back against the increasing use of CVAs. A common criticism is that CVAs are open to misuse by struggling retailers, as part of short-sighted programmes to improve profits by restructuring lease liabilities at the expense of landlords, whilst protecting other classes of creditors. The legal challenges to the approval of the CVAs for House of Fraser and Monsoon Accessorize are symptomatic of how retailers are beginning to face greater resistance in the face of a proposed CVA.
Elsewhere, some point to the increasing use of turnover rents in the retail sector (typically, where the rent is calculated by reference to the gross turnover of the tenant) as signalling a shift in the bargaining position of landlords and retailers. H&M’s reported request to landlords for ‘total occupation deals’, whereby returns into store or online would be deducted from the shop’s revenues in the calculation of turnover rents, arguably underlines the way in which lease terms may be required to shift, or adapt, to meet the changing retail landscape.
As technology and ecommerce develop and the ‘shopping mall of social media’ plays an increasing role in fashion, there is widespread acknowledgement amongst retailers of the importance of ‘experiential retail’, in which physical retail spaces offer customers immersive, in-store experiences that go beyond the traditional retailer-consumer relationship. A shift in this direction will doubtless have implications for the negotiation of retail lease terms, with the permitted user and related clauses adapting to take account of such experiential retail activities.
What next? Players in the fashion retail sector, whether landlords or tenants, will be considering innovations in lease terms which better reflect the changing shopping habits and retail environment in the UK. As H&M leaves matters to its landlords, and John Lewis highlights the need for landlords to work with it to help reduce costs, it is important that terms develop in a way which is fair on both sides, reflecting the practical realities of modern retail.