Retail property market – do landlords and tenants need to listen to each other or is the customer key?

Retail property market: It’s a seemingly broken record when hearing news about the high street and its rapid decline when facing the challenges of online shopping and evolving customer needs with department stores struggling and many other retailers facing insolvency.

Huge gaps in the high street are left unoccupied with landlord’s unable to attract new tenants and having pay rates and costs themselves. Is the reconciliation between the landlord and tenant relationship key to the retail property world fighting back or is it accepting that the customer now controls the market?

The answer is, probably both.

Traditional lease models driven by landlords demanding terms of 10 or 15 years with upwards only rent reviews, limited tenant break rights and strict provisions on alienation left retailers with limited flexibility and the retail market has seen a flurry of tenant’s entering Company Voluntary Arrangements (CVAs) and effectively forcing the landlord to re-gear the leases on more flexible terms with the tenant. Landlords are under increasing pressure to find more imaginative ways to guarantee an income stream from its units either by introducing turnover rents, inclusive rents (i.e. taking on some of the risk themselves in relation to the increase or decrease of business rates) or zero rent but with tenant’s covering service charge, insurance and rates. Moving forward, the demand for more imaginative ways for rent to be paid will continue to evolve if the landlord wants occupation of its units and if the high street is to survive.

Generating greater footfall in the high street is driven by the customer’s shopping experience which requires decent facilities, attractive events, social spaces and access to Wifi. This means greater expenditure for the landlord, for example in technology and marketing costs which will no doubt be reflected in the service charge costs recovered from the tenant so in order to create the best customer experience, the landlord and tenant have to work together more closely. The greater the footfall, the greater the turnover for the tenant so an increase in turnover only rent provisions in leases has become more common. Coupled with this, tenant’s want greater flexibility when renting retail space in order to respond to the customer’s demands both in terms of the shopping experience and click and collect shopping trend. Retail tenants might want to use the floor space for both selling clothes, for example, with the inclusion of a coffee shop as well as requiring more floor space for storage in order to cater for the click and collect shoppers. Landlords and tenants again will need to work together in order to cater for the changes in the customers habits by allowing greater scope for sharing space, allowing franchisees/concessions and allowing more flexibility in the user clauses for both tenant and any franchisee/concession.

Specific lease terms in relation to busy shopping periods such as Black Friday and Christmas such as a “Santa Clause” has seen the Landlord’s right under the lease to re-enter, insect or carry out works to the property being restricted during these times to ensure the customer’s shopping experience is not affected by the Landlord, keeping footfall and turnover high. Relatedly, compromises between the landlord and tenant on signage provisions to allow a tenant greater control to maximise marketing for sales, offers and trends can help tenant’s keep the customer experience at an enhanced level are necessary.

Collaboration between retail landlords and tenants seems one way to tackle the decline in the high street by moving away from the traditional long, restrictive lease to a shorter, more flexible model to attract a more vibrant tenant mix to enhance the customer experience and generate footfall – it’s all about having the right lease, not just the right tenant.

Kindly shared by Paul Robinson Solicitors