E-tailing may seem like a threat to retail landlords, but an innovation could allow them to realise some of the revenue generated by their tenants’ online business.
By Gerard Tomnay
With business-to-consumer internet sales forecast to rise from around £7bn today to £35bn in 2002, the age of e-commerce is here. And if e-tailing takes off in the way that some forecasters envisage, retail landlords face the prospect of declining turnover rents – and property values.
But the e-commerce age has also ushered in an innovation that could enable retail landlords to establish a new partnership with their tenants. It is a development that allows both sides to profit from the integration of new technology with real estate. The concept involves redrafting traditional FRI shopping centre turnover leases to enable the landlord to capture online sales made through a centre’s own portal – a website that replicates the shopping centre on the internet.
There is still some way to go before such “wired leases” become established. Critics may argue that retailers could be reluctant to belong to the landlord’s portal, because just as many retailers have their own websites. But some landlords respond that online shoppers will prefer to browse an internet centre in the same way as they do a real shopping centre – without having to access a succession of sites.
This will be especially so once the digital television platform becomes established. The “single portal” approach would also greatly simplify payment and delivery at the end of the virtual shopping trip.
However, several key concerns about wired leases remain.
How will retailers be motivated to use the landlord’s portal, especially when they have their own?
Initially, tenants may not be keen to share their online revenue but – especially if the centre is a flagship one – the brand that the owner creates for it could attract online shoppers and hence enhance e-tailing incomes.
Evidence suggests that e-commerce will not eliminate bricks-and-mortar shopping – far from it. Shoppers value the all-round “retail experience” and the “real” shop is the best means of creating the relationship with a customer. Retailers are therefore re-engineering their business models to create synchronised multi-channel strategies, and a shopping centre portal in prime locations, run by the landlord, should be attractive to such retailers, if it fits their own strategy.
An example of property companies adopting a multi-channel strategy for real estate is the “virtual mall”. Two models for this phenomenon are emerging: a “click-through” portal that takes the consumer to the retailer’s own website, and the other a “one stop shop” website that allows the consumer to purchase directly from the retailer using that website.
What should the ratio of “base rent” to “turnover percentage” be?
Should the base rent be set at a higher or lower level than traditional turnover leases? One of the attractions to retailers of e-tailing is the prospect of reducing their overall space requirement. They are already seeking shorter, more flexible leases. If retailers are to sign up, landlords may need to demonstrate that the wired lease terms will be more flexible.
If the UK follows the US example, we may see “wired shopping centres” where broadband service providers form alliances with shopping centre owners to enable them and their tenants to develop their e-commerce strategies.
This process can enhance the productivity of the centre and establish a critical link between the e-marketplace and the customer. As Deutsche Bank points out in its publication Wired real estate: the ultimate portal: “The more productivity improves, the higher the rents will be as the centre becomes lucrative for retailers – an effect that may increase base rents.”
The challenge is to find the right blend. It may be possible to review the proportion of base rents to turnover at review dates, but retailers should be aware that landlords are likely to seek the ability to revert to an open market rent if click-through sales are too low.
To what extent should service charge clauses enable landlords to pass on the cost of setting up and running the virtual shopping centre?
Retailers may argue that this cost should not be borne by them, especially where the portal is formed by a joint-venture arrangement and the set-up costs can be shared between the joint venturers.
Could wired leases apply to income generated from a retailer’s own website that was accessed via the landlord’s shopping centre portal?
The answer is “yes” – provided the retailer’s website recognises that the customer arrived there via the landlord’s portal and made a purchase.
Following the recently announced Capital Shopping Centres/Mall UK virtual mall model, it may be that landlords will prefer simply to receive a commission or profit share from retailers that make sales through the virtual mall rather than use a wired lease.
This arrangement removes the parties from the shackles of the landlord-and-tenant relationship – especially where the recipient is a joint venture company that is not “the landlord” under the retailer’s corresponding lease. However, it removes the usual remedies for default, such as forfeiture and distress.
Using the right technology, it is easy to identify the amount of sales made, thereby avoiding the problems of evidence inherent in traditional turnover leases. An alternative may be for retailers to pay a fee to landlords for every click-through customer who visits the site via the landlord’s portal, whether or not a purchase is made.
This would give the retailer a potentially higher likelihood of attracting customers – through the shopping centre brand – without paying a turnover rent. One thing the landlord will be unable to do unilaterally is to provide a link from its portal to the retailer’s website.
Who is making the sale if a customer buys online using the virtual shopping centre?
This question raises important legal issues, such as how is the sale contract is made, and between what parties. Retailers that are unenthusiastic about wired leases may argue that landlords that sell goods through their own websites will have to face difficult questions about such sales. What about all the consequent product liability/Sale of Goods Act issues? Where is the point of sale? What are the Consumer Credit Act liabilities? Who is liable for delivery failure?
From the retailer’s perspective, if one payment is made online at the end of the visit, who “owns” the money – landlord or retailer? These are not insurmountable problems if the legal analysis is properly thought through.
Despite all these concerns, online retailing is growing too fast for landlords not to consider how they might benefit from the process. And the “digital asset” for the landlord’s hitherto “analogue product” could be wired leases or virtual malls. So if they haven’t already faced this development, retailers should brace themselves for approaches by shopping centre landlords seeking to explore it further.
As with so much else in the field of e-commerce, the question is not “if” but “when” such innovations will be implemented.Gerard Tomnay is a member of Nabarro Nathanson’s eProperty Team, which is developing several initiatives including wired leases and virtual malls
