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15 Jan 2021

Can Turnover Rents Save Bricks and Mortar Retail?

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Landlords and tenants need each other to survive and there is a way forward.

As those in the struggling retail sector will be all too aware, the traditional fixed income leasehold structure is looking less and less fit for purpose. The pandemic has only expedited the trend towards landlords taking on greater financial risk. Turnover leases are fast becoming the norm albeit in various different forms. The level of risk a landlord will agree to take often depends on the financial position of the tenant and the bargaining power of the individual parties.

Whilst a standardised method of calculating turnover or revenue share has been mooted, it may not fit all relationships and business models. Individual circumstances will often require specific and sometimes complex drafting.

A significant issue to consider is the treatment of online sales. Landlords will argue that physical store presence enhances the tenant offering and therefore serves to boost overall sales (including those made online). The question of how online sales can be correctly attributed to one particular store or whether it is indeed fair to attribute online sales to a physical store remains open for debate.

One thing that is key for landlords when considering a turnover model is access to data. In order to calculate accurate turnover, the tenant should be transparent with its sales data and preferably profit and loss statements. Further, exchanging footfall information can be massively beneficial especially when it comes to understanding the impact the physical store has on online sales. It is about understanding the role of the store beyond just the sales going through the till. A well-informed landlord in possession of sufficient practical data should avoid missing out on a share of vital revenue.

The relationship between retailers and landlords is fraught with challenges. Tough times can lead to tough negotiations but retailers and landlords need each other to survive, particularly given the changing role of bricks-and-mortar stores. Open dialogue, flexibility, an understanding of each other’s businesses and a willingness to trial new solutions are the key to strengthening this all-important relationship.

This article first appeared in CoStar on 14 January 2021.