The year ahead for retail from a commercial property perspective
Rent concessions
Given the continued uncertainty in the retail sector during these Covid stricken times, one of the main issues in this coming year will be how rent concessions are to be dealt with going forwards.
We have seen landlords being keen to assist retail tenants by allowing either a reduction in rent or otherwise altering payment terms during the “Support for Business” initiative by entering into rent concession letters or other forms of agreement.
However, such concessions are designed to be temporary in nature and now that it seems that the retail sector’s ability to bounce back as quickly as was first hoped may be hampered by new variants of concern, landlords will be carefully considering whether to allow further extensions to such concessions.
Indeed, what many tenants may not appreciate is that many such concessions will simply be postponing the reduced rent until determination of the lease or expiry of the concession period, whereupon the arrears in rent will be expected to be repaid to the landlord. This may well result in retail tenants being faced with significant rental payments due upon the expiry of their leases (depending on the terms of the rent concessions agreed between the parties).
The Commercial Rent (Coronavirus) Bill
The Commercial Rent (Coronavirus) Bill is currently working its way through parliament, together with a new code of practice for commercial property relationships post-pandemic. As the Bill introduces a mandatory arbitration process for landlords and tenants where there is no agreement as to rent arrears which have accrued due to the coronavirus pandemic, and as claims brought from 10 November 2021 in relation to such arrears will be stayed on application to enable the matter to be resolved by statutory arbitration or otherwise, there will no doubt be an increase in such dispute resolution processes during the coming year.
Effect of turnover rents
Most turnover rents will refer to a percentage of gross turnover or deemed gross turnover for a specific period based upon the goods disposed of, services sold or other form of business carried out in or from a property.
Given the entrepreneurial spirit of many retailers, the pandemic has resulted in more and more goods and services being sold online, many being outsourced to cheaper, out of town manufacturing warehouses of the tenant as opposed to being sold from a specific retail store.
Whilst many turnover rent provisions will try to capture orders originating or collected from the premises in question by telephone or online, many tenants may have their IP address or phone systems set up at these alternative out of town premises. Landlords will need to be careful in their drafting of turnover rents in order to encapsulate such online of ‘off-site’ retail services. We will no doubt see an increase in litigation in respect of interpreting such turnover provisions.
What next for the shopping centre?
We have seen shopping centres being decimated over the years, with the pandemic pushing forward what was ultimately an inevitable push for cheaper online products that offer greater variety. That leaves the shopping centre in precarious position, which is reflected in the current downwards valuation of such sites. This is leading to many forward-thinking developers deciding what is next for such pieces of real estate.
Gone are the days of the usual anchor tenants. They have been replaced by the likes of Primark who have no online offering, thus encouraging footfall; or pop-up stores offering more of an experience than simply selling goods. Aldi and Lidl appear to be pressing on and drive throughs appear to be in more demand than ever. Then there is the residential development mixed use schemes in city centres. How they will interact within existing commercial centres will remain to be seen.
Given these uncertainties, we will no doubt be seeing a lot more flexibility being built into leases allowing for possible upwards and downwards rent reviews and either even shorter-term leases (tenants are already pressing for shorter lease terms, typically 5-10 years) or more frequent tenant breaks being included.
We are already seeing:
- commercial leases disallowing suspension of annual rent (save for damage/destruction caused by ‘insured risks’ or ‘uninsured risks’)
- movement of annual rent from quarterly to monthly basis
- landlords preserving their ability to collect rent arrears (section 82(2) Coronavirus Act 2020)
- landlords seeking access to rent deposits
Rent reviews
With the intended end of Retail Prices Index (RPI) in 2030, we are now starting to see an increase in index linked rent reviews referring to Consumer Prices Index (CPI). Some landlords are content to leave RPI as the means of review, with the parties deciding what alternative means will be used once RPI is no longer adopted. Others are preferring the CPI option.
We have yet to see many upwards and downwards rent reviews being inserted into leases in practice but with the ever-changing landscape in the times that we are currently living, now might be the time that we finally start to see these emerge.
If you have any queries on the Code or require help with compliance, please do not hesitate to contact our data protection team.
Garry King
Garry is an associate partner in our real estate team, and advises clients on a full range of commercial real estate matters. Garry acts for a well-known North West developer in a key out of town retail development in the North West, together with various other out of town retail development sites for property developers. He has also acted for a national housing developer in the acquisition of numerous residential development sites and overseen the complex completion of a national major student accommodation scheme.
Protecting your business from discrimination claims
During these stressful times for those working in the retail sector, disagreements and conflicts between staff that may amount to discriminatory conduct are becoming all the more common. This article sets out how employers can protect themselves from liability for the actions of its employees which are contrary to the values and ethos of the business.
My product is better than yours: the role of comparative advertising in a competitive world
Comparative advertising can capture your consumers’ attention: but with a complex legal regime of regulations, rules and case law, getting it wrong can result in potential penalties. So what are these rules and how do you ensure you ensure you stay on the right side of the line?
Our quarterly retail update is designed to bring you the latest news and legal developments relevant to the retail sector. If there are any areas you would like more information on or if you have any questions or feedback, please do not hesitate to let us know via our feedback form or get in touch with any member of our team.
Copyright in this publication is owned by Pannone Corporate LLP and all rights in such copyright are reserved. Pannone Corporate LLP is a limited liability partnership registered in England and Wales with number OC388393. Authorised and Regulated by the Solicitors Regulation Authority. A list of members is available for inspection at the registered office, 378-380 Deansgate, Manchester M3 4LY. We use the terms “partner” to refer to a member of the LLP.