By Polly Warrack, Associate Partner
You do not need to have a specific knowledge of retail property to know that the sector is in trouble. The threat of e-commerce has been building for years, as have the rising overheads of rents, rates and service charges for physical stores and the number of brands entering into CVAs and administration. Now, the forced closure of many non-essential shops due to covid-19 combined with the squabbling between retailers and landlords over rent payments in this period mean that many are questioning if the sector has a future.
The reality is that physical retail requires significant reforms if it is to survive, with turnover leases providing a potential solution to both landlords and retailers, as well as those looking to provide a sensible and relevant valuation of an asset.
For those unfamiliar with the term, a turnover lease is a lease where the rent payable by the tenant is calculated either wholly, or partly, by the actual turnover achieved by the tenant’s business operated out of the premises. For a business, such as a cinema or restaurant, that can provide a record of sales capable of audit and that is attributable to the number of people on site, this model makes a lot of sense.
However, things get complicated when you try to apply this model to a retail tenant and you need to count online sales. What counts as online and what counts as footfall? If you return an item in store that you ordered online and exchange it for an alternative product, then was this an online purchase or an in store one? If you are the retailer and the level of rent that you pay is attached to your turnover in store then naturally you will think the former, while if you are the landlord then you are much more inclined to think the latter. Models based on footfall count and local postcodes are being explored at present.
To save high streets and shopping centres up and down the country, we need to agree a fairer rental base. The collaboration of industry bodies, such as RICS, BPF, BCSC, together with local authorities, to agree a consensus about how omnichannel retailing can be attributed to instore turnover would be an important step in agreeing a formula that can then be used as a benchmark for setting and reviewing rents, as well as creating a meaningful basis for valuing property. However, to make this work, we need trust. We have seen a fundamental lack of trust between many retailers and landlords play out publicly in recent weeks over the issue of rent, demonstrating the gap that needs to be bridged. If retail is to have a future, it is time for both parties to start pulling on the same end of the rope.