We all know that multichannelling is having a major impact on the retail industry and the negotiation of leases is not immune from this.
One of the main areas affected is the capture of turnover rent and, increasingly, tailored drafting is required to reflect the differences in tenants’ businesses. For those who weren’t able to make our Retail Property Disputes Seminar last week, here are some of the key questions to bear in mind when agreeing turnover rent provisions at heads of terms stage:
- How does the tenant allocate its online orders – to the nearest store or to a separate online company?
- Which channels does the tenant use at the moment and how might its business evolve during the life of the lease?
- How will online returns to the store be dealt with and how can this be policed?
- How will the turnover provisions deal with click and collect orders that are picked up from the store?
- What about group companies which comprise a number of separate retail brands operating from their own stores, who allow customers to collect items ordered online from a designated store regardless of the brand? Convenience is key to the customer but if retailers are charged turnover rent on these items, they might be tempted to only allow collection from a store with no turnover rent provisions even if it is not as convenient or, in the worst case, not allow collection at all.
- How will the lease deal with orders placed on devices within a shopping centre but outside a tenant’s premises?
- How will the landlord audit information provided by the tenant and does it know enough about the tenant’s business to do this effectively?
The key to effective turnover rent is greater understanding and communication between landlords and tenants, a trend which started during the recent downturn and which is of growing importance.
It is also worth landlords and tenants bearing in mind the rent review provisions. Over time, it is likely that retailers will carry less stock in their stores as sales continue to migrate online. The upshot of this trend is that the optimum demise size is likely to decrease as less back of house space is required.
There is also an increasing trend towards shops becoming showrooms, where customers come to inspect and learn about goods that are then purchased online using a variety of devices. Over time, it will be interesting to see how this change of use affects rental levels, particularly in places such as shopping centres, where conventional retailers are mixed with multichannel operators.