Could flexible leases help to save the high street?

19 Sep 2019

The challenge facing the high street
2,870 retail stores have closed in the UK in the first half of 2019, and the British Retail Consortium has estimated that 900,000 retail jobs could be lost by the end of 2025.

The Channel Islands have not been immune to the pressures faced by retailers, with a number of high profile names disappearing from the high street.

Many retailers, particularly in fashion, struggle with profitability as consumers increasingly move their shopping habits online. This has led to calls for landlords to reduce rents and offer more generous terms to tenants.

On the other side, landlords are facing the financial pressures of vacant space, tenants on the edge of insolvency and banks that expect to be repaid on their mortgages, regardless of the financial health of the tenant.

Traditional lease terms
Whilst there are wider suggestions to improve town centres such as rates relief, free parking and Sunday opening, perhaps both landlords and tenants could be more innovative in their approach to retail space.

If we consider the traditional landlord and tenant relationship, the tenant would be expected to take a full repairing and insuring lease, for a term of several years, at a rent. The rent will usually increase with RPI or to an open market rent every three years in Jersey (or five years in the UK).

The tenant may negotiate a break right (possibly subject to a cash penalty), monthly (rather than quarterly) rent payments to ease cash flow and a rent-free period to assist with the tenant's fitting out costs.

Do retail leases need to be more flexible?
Whilst the lease terms described above have traditionally been accepted by landlords, tenants and banks, in light of the difficulties facing the high street, it may be time for a wider range of flexible terms to be considered.

Variable monthly rents
Does the tenant have particularly busy trading periods followed by quieter periods?

If so, would an agreed annual rent with variations in the monthly payments work better for both parties?   This sometimes happens with bar and restaurant leases – they might include a mechanism where the tenant pays a higher rent in the busy Christmas period followed by a reduced or zero rent payment in January.

The net result should be the same for both parties but periods of slower cash flow (which often tips businesses into insolvency) are more manageable for the tenant.

Turnover rent
Under a turnover rent mechanism, the tenant will usually pay a base rent plus an additional amount, calculated as a percentage of the retailer's turnover.

This is a popular model in shopping centres where cashiers' tills can be electronically monitored by the landlord to ensure that all turnover is being actively captured. However, in theory (with some investment) the turnover rent model could be used more widely in the high street.

How green is your lease?
Tenants almost always pay for business rates, electricity, water and gas on top of their rent. One method of reducing a tenant's overheads (and improving the landlord's green credentials) is to install solar panels or energy-saving systems in buildings.

Would you like a pastry with those jeans?
Are retailers making the best use of their space?

Subject to planning approval, it is possible for retailers to sell hot drinks and pre-prepared food.

Some established high street retailers include a café on site. The café helps to drive footfall through the retail store and transforms redundant floor space into a profitable bolt-on. Bicycle shops often double-up as coffee shops, making the shops social destinations in themselves.

Primark has already adopted this approach, and other retailers offer a loyalty scheme, giving out free coffees to customers.

Take in a lodger
Retailers could also share space with non-traditional vendors on a concession or licence basis, to monetise unused space and drive new customers into their stores.

Similarly, in the way that start-up business hubs offer flexible office space for new businesses, we could see the development of retail hubs in which retailers share space and facilities on flexible terms.

If landlords are willing to be open-minded to more flexible use of retail space, and tenants willing to think more creatively about their businesses, then we may see some interesting letting deals in the next 12 months.

Innovation is essential
Online shopping is here to stay, so the look and feel of the high street is going to change.

If the high street is to retain a traditional retail offering then both retailers and landlords will need to be more innovative in their approach to letting terms and the way that retail space is utilised.

There is no magic bullet which will save the high street, but flexible leases, innovation and diversification could help to make retail a more sustainable prospect for the future.

Bedell Cristin will host a seminar entitled The Future of Retail at the Pomme D'Or on 19 November. If you would like attend, please contact events@bedellcristin.com. Places are limited.

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