Is an increase in ’give and take’ between landlords and retailers on the near horizon?
Is experiential retail the way forward for retail landlords and fashion brands alike given the inexorable power of the online channel? If so, what are the legal issues?
Certainly it would appear that the evidence is there. Selfridges now offers the Bowl and sells alongside it skatewear, whilst Primark has its interactive flagship megastore in Birmingham, and Adidas a new high-tech Oxford Street, London flagship store. Meanwhile John Lewis has announced plans to launch a customer experience-centric shop in Southampton offering a range of cookery lessons, wine tasting and “stay and play” gadget areas.
This shift towards experiential retailing requires the terms of retail leases to evolve in tandem. For fashion retailers this will include, for example, negotiating the permitted use as defined in the lease in sufficiently wide terms to include those ‘experiential’ retail offerings. Similarly, landlords and tenants alike must consider the extent to which the retail planning permission sufficiently encompasses the proposed experiential and service-related uses. Permitted opening hours may also require extension in retail leases, to adequately cater for the diverse range of uses.
The turnover rent model
The use of physical stores as showrooms, offering unique and immersive experiences which have the effect of driving online sales, also raises questions around the turnover-rent model widely adopted in retail leases and in particular, how such turnover rents are defined.
A turnover rent is one in which the whole or part of the rent payable under the lease is determined in accordance with the turnover generated at the premises. Such a model may be adopted instead of open market rents as a means to enable both landlords and tenants to share in the potential risks and rewards of the tenant’s business: where trade is good and revenues high, the landlord will receive an increased rent; and in difficult training conditions, the tenant will be insulated to the extent that it only has to pay a turnover rent where this amount exceeds the base rent (offering a degree of certainty and fixed costs).
But given omnichannel retailing factors such as the proportion of base rent and turnover rent, the mechanism by which this is recorded, and the revenue streams that are incorporated within the definition, take on greater significance in balancing the respective interests of landlords and retailers.
Evaluating ‘click and collect’
For example, should ‘click and collect’ orders made online and fulfilled in store be included in the definition of turnover rent? In circumstances where much of the physical store is utilised as a showroom driving online sales, the revenue generated instore will inevitably be lower as a result. This exemplifies the way in which the online channel has skewed the traditional interrelationship between footfall and revenue and how, depending on the lease terms governing the turnover rent, either the landlord or tenant may be disadvantaged as result.
Recently H&M has been pushing landlords to agree that any returns that come into store, including online purchase, are deducted from the turnover rent calculation. This again highlights how the relationship between online and instore retail is driving change within the industry.
The trend appears to be towards a changing dynamic in the landlord and retailer relationship, with give and take on both sides. One example of this can be seen in H&M’s reported offer to landlords of ‘total occupational deals’ by which the landlord receives a sum linked to the amount of sales the store generates (in keeping with the above turnover rent model), to be divided between service charge, rent, and business rates.
But how in turn this will play out with HM Revenue and Customs and local authorities remains to be seen!