COVID-19 impacted all sectors, but few harder than retail. Even before lockdown, retailers were calling for a change in thinking towards leases, and the calls are now louder than ever. Retail operators want leases that now allow them to react quickly to change and limit risk (often sharing it with landlords more).
In this final blog in our three-part blog series on leases, we look at 10 key considerations for retail operators when reviewing and drafting new leases, or managing existing arrangements:
1) Term lengths may shorten. This was a prevalent view before the pandemic, but that view has hardened, with commentators suggesting that most retailers now want a five-year lease with a tenant break at year three. It will be interesting to see what the ‘new norm’ is now, post-pandemic, and once the other headwinds (energy costs, high inflation) have subsided.
2) Regardless of whether or not lease rents are turnover-based, landlords will want greater transparency on reporting on trade. This is to allow them to identify any potential issues as early as possible.
3) Tenants may seek rent suspension provisions in the event of future pandemics. Until insurers are able to provide suitable cover to landlords, this will remain a commercial negotiation between the parties. An alternative could be a temporary switch from open market rent to turnover-dependent payments.
4) Given the volatility of the market, tenants are increasingly looking at a turnover rent model, which will put an element of risk on the landlords. While there is resistance because of the impact on investment viability and valuation of assets, in some instances landlords may consider this as a workable option.
5) As retailers’ offerings become increasingly omni-channel, landlords and tenants will need to recognise and negotiate commercial terms to cater for ‘click and collect’ services – and the fact that shops may be used more as an advertising function, with shoppers then ordering items direct from the tenant’s website.
6) Long rent-free periods may give way to more sustainable rents over a longer period to promote longevity.
7) Service charge, insurance rent and other ancillary rents may be replaced by all-inclusive rents, which will give more cost certainty to tenants, who can plan for future expenditure with more confidence.
8) Upwards-only rents have been a constant topic of debate between landlords and tenants. Tenants have long argued that they could be replaced with “market rent” leases to reflect the potential effect of downturns in the market, although this has been fiercely contested by landlords, who are in need of investment certainty.
9) While monthly rents are more common than ever, they may be the norm, rather than the exception, to allow tenants to plan for the future with more confidence.
10) Tenants will want to see specific obligations in service charge provisions to require landlords to provide additional health and safety measures linked with pandemics; such as managing social distancing, providing deep cleaning and sanitation stations.
Our Occupier team acts for occupiers across a wide range of sectors, including retail, leisure, warehousing and offices on all leasehold matters – from lease acquisitions and agreements to alterations, breaks, renewals, rent reviews and disposals. Our lawyers use their specialist experience and sector knowledge to provide practical advice to ensure clients have maximum value, protection and flexibility in their leases. Find out more about the whole range of services our expert team offer on our Real Estate page.
About the author(s)
Kay Desai has gained a reputation of being fiercely committed in advising a wide variety of corporate occupiers in acquiring, disposing and managing various types of corporate space from offices to warehouses, retail units to leisure accommodation and everything in between. Proactive and commercial, delivering to tight timescales within a specific budget and minimal fuss is key to her clients' business objectives and her understanding of the key drivers behind any transaction allows her to focus on getting deals agreed efficiently while protecting her client's position.
In particular, Kay is embedded in the leisure sector, advising market-leading operators on large-scale acquisitions and disposals. Being both a member of the Leisure Property Forum committee and heading up the firm's leisure taskforce, she is widely recognised as one of the go-to lawyers in the sector.