The pandemic has been a difficult time for retail, but it has also brought about some positive change in the structure of retail leases.
In spring 2020, Shoosmiths chaired a webinar, following the onset of the pandemic, where it was suggested that landlords and tenants would need to recognise their symbiotic relationship and work together in order to survive. There has been a mixed approach since then from both landlords and tenants but, overall, we are now seeing that prediction play out in the structure of retail leases.
Lease lengths reducing
The length of a lease was already on a downward trend even before the pandemic hit – EG’s ‘2020 Retail Review’ suggested average lease lengths for retail space have reduced by 28% in the past decade – but this trend has accelerated in the last year, with lease terms often now being for only three years or less, outside the 1954 Act and containing flexible break options for either the landlord, the tenant or both. The upside for the tenant is better terms from the landlord with the lease outside of the 1954 Act, and the upside for the landlord is that there is no prospect of the tenant being able to insist on a renewal on the same terms.
Consequently, break options have become much more common and complex in their drafting and are being used not only to terminate a lease, but also to refine an existing deal.
Break options are included to give the tenant the flexibility in their business and, whilst it might seem obvious, it is essential that they are capable of being triggered.
Break conditions
In this respect, conditions such as payment of rent need to reflect the nature of the lease. This principle has become more complicated with the different structures of turnover rent and the introduction of base rent or on account rent. So, when rent is paid or when turnover rent is reconciled, this needs to be borne in mind. If rent ceases or is reduced as a result of a pandemic, for example, then the break condition needs to reflect this as well. As can be seen from the raft of case law in this area, strict compliance is required in order to break a lease, and any ambiguity risks the viability of the break option.
Ensuring that side letters, deeds of variation etc do not impact on break rights is also of crucial importance. These documents are entered into to reflect concessions that have been agreed and will form an important part of a retailer’s estate management – how does it deal with the requirement to pay rent on a break right? The tenant will not want to be in a position of having to repay monies in order to ensure compliance.
Rent payable in a lease is currently tending to be lower than pre-pandemic and, in some cases, no rent at all is payable or there is an all-inclusive rent.
Turnover rents
Turnover rents are fashionable again, but with renewed vigour as drafting has been required to future-proof for the changes in both technology and shopping behaviours. In fact, one could argue that this evolution is keeping tenants in operation, allowing landlords to share in the upside. However, there is still a tension as to what is to be included in the definition of “turnover” and there is certainly not a “one size fits all” answer to this.
The effects of this will not be seen for years as the golden ticket of “1954 Act protection” seems to have diminished in value. The downside for the tenant is the lack of certainty as the current lease structures may allow the landlord to terminate at any time if they find a better deal. However, as we live through another lockdown, it’s worth remembering that part of the reasoning for these current decisions is based on survival.
Collaboration is key
One thing that is certain, however, is that the retail community is innovative and intelligent and, as we look forward to a post-pandemic future, we can expect to see a heightened focus on the retail experience to draw consumers away from their laptops and back to the sheer enjoyment of shopping in a store. At the heart of this, will be landlords and tenants continuing to work together.
James France, Head of Global Leasehold Property, Frasers Group, echoes this point: “The last year has shown the importance, more than ever, of landlords and tenants operating together in partnership. Since the onset of the pandemic we have worked with various landlords and agreed numerous deals, which balance the impact on the investment value to the landlord and the viability of that store to us as a business. We are actively looking to renew existing stores and acquire new stores on turnover based leases as the risk and rewards are more equally shared between tenant and landlord as partner. The age of upward only rent reviews, 54 Act lease renewals and Zone A based rentals is at an end. Of course, the consistent calling for retail to adapt and become more relevant must also apply to the vast amount of property that retail occupies.
“Whilst we have a very active online business, bricks and mortar remains an essential part of our business model. The experience of the customer is key. We need landlords to work with us to develop premium retail destinations. If we do this, sales will increase which, specifically for turnover rent portfolios, benefits everyone. Collaboration is key to ensure the revival of the high street.”
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This article was also published in The Retailer, our quarterly online magazine providing thought-leading insights from BRC experts and Associate Members.