How is e-tailing affecting the revenue of traditional shops – and how will leases evolve to reflect new cash flows? Allan Wernham investigates
The threat from pure e-tailers to traditional high street shops seems to be not as big as was first feared – or at least for now. However, there is no doubt that the multiplicity of retail channels and the general state of the retail industry mean that operators must now seek greater flexibility in their relationships with landlords. And these changes all start with the lease.
Leaving aside the purely commercial concerns that have been thrown into sharper focus as a result of the emergence of e-tailing, such as the duration of the lease commitment, there remains a number of factors to be considered in legal negotiations.
For many retailers in large developments, it is essential to control the number of competitors in the vicinity. This maxim is particularly true for non-fashion retailers – for example, mobile phone retailers, book and music stores and card shops.
To date, imposing such restrictions has been relatively easy for the parties to document, albeit that care has to be taken not to fall foul of the Competition Act 1998. The rise of online shopping has created a new risk and has raised a new question mark over the enforceability of such exclusivity agreements.
Plugging into purchasing
It is becoming more common to find that a retail development will include an internet café- like easyEverything- or a terminal for internet access- take the Welcome Lounge at Midsummer Place in Milton Keynes, for instance- either in the mall itself or in another store.
Yet what of there is a restriction on other book retailers in the mall, for example? Would that restriction include retailers that are selling books via internet kiosks in competition with the traditional store that benefits from the exclusivity agreement? Depending on the wording of the restriction, the retailer may not have sufficient protection.
To ensure that they are not exposed to such risks in the future, retailers who require exclusivity provisions should try to incorporate wording in their lease that is sufficient to cover this risk.
However, given landlords’ general reluctance to agree such provisions because they desire maximum flexibility, retailers may have to live with this new limitation on the effectiveness of such agreements.
Lease flexibility
As retailing methods develop, retailers are offering their goods and services over a multitude of different channels. But those who want to integrate those channels – either now or in the future – will need to ensure that they have the flexibility use their premises for their different forms of retailing.
It is certainly arguable, from a retailer’s point of view, that because retailing for the permitted use over the internet – including the fulfilment of orders – is not prohibited, it is by default permitted. This, however, can and should be put beyond doubt in the drafting of the lease.
In any event, retailers should ensure that the alteration provisions in leases do not prevent them from adding or removing internet terminals or other devices to facilitate a new retail channel as necessary. Implementation of a national strategy for a new channel may have to be done quickly – yet the requirement to obtain landlord’s consent for such alterations in advance may frustrate that aim.
In addition, a retailer who sells a range of products through another channel, such as the internet, may wish to fulfil orders via their local stores. If that range includes items not included in the “permitted use” for the shop, and the storage space is to be used for “storage as ancillary to the permitted use”, it would be a breach of the lease to store such items in storage space forming part of that shop. User clauses that permit storage should not limit the items that can be stored (other than the usual limitations on, for example, dangerous items).
In the current climate of price deflation, retailers will be looking for other ways to generate income from existing floorspace. Introducing concessionaires or franchisees to shop units could help.
Often, however, provisions allowing occupation by such third parties do not permit use other than for the principal permitted use under the lease. Such flexibility should be sought, at least for part of the shop in question.
The main risks relating to turnover rents involve the landlords’ ability to track income generated in a shop. Most leases will include in the definition of turnover sales generated by or attributed to the shop in question even if performance or delivery takes place elsewhere.
For the moment, landlords would have difficulty in including sales that are generated through the internet, which are not specifically attributable to the store in some way. The wording of most turnover clauses as they stand probably means that they are more often honoured in the breach. However, it would be prudent for retailers to review the usual wording to ensure that they can actually comply with the lease provision.
A re-evaluation of terms
There is no doubt that flexibility is being demanded more by retailers and developers. And this evolving demand requires a re-evaluation of traditional lease terms. However, a co-operative approach to any re-evaluation will be essential in developing a lease that meets the modern and ever-evolving needs of landlords and retailers.
Costs and margins |
Other factors affecting the high street’s revenues |
The growth of e-tailing may be one of the most obvious challenges to the traditional shop leases. But other issues will also come into play. The effect of price deflation is one. It means that even if sales increase or stay the same, the profit margin in the good sold may be decreasing. Turnover leases make no allowances for decreasing margins. Retailers should therefore consider this when agreeing the percentage of turnover which is to be paid in rent. Branding is also becoming much more important. And to maintain customer interest, landlords are likely to spend more money on advertising and promotions. However, as such costs escalate, and the benefit of incurring the expenditure sings back towards the landlords, retailers should consider what additional controls on such expenditure are necessary, perhaps obliging the landlords to contribute. It is not just retailers who are seeking flexibility in their property requirements. Landlords are also looking to leverage their physical assets by providing a much broader experience, introducing healthclubs and entertainment facilities, such as cinemas and bars. Old models of apportioning service costs based of floor areas will provide a less equitable mechanism for sharing the cost in developments where such “experience” retail is introduced. Retailers therefore need to consider what protections are necessary in the lease to ensure that they do not pay for services which no benefit is derived. |
Allan Wernham is an associate and e-business manager in the real estate group of
