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Contact Turley & Co for lease strategy and market rent valuation advisory. A lease may enable tenant and landlord activation of market rent reviews and some leases provide for rent reductions. Our experience includes over 350 resolved or arbitrated commercial property rent valuations including in 2019, annual rents circa $1m at Hamilton and New Plymouth, and the new $20m Hastings Health Centre development advisor and valuer. Refer to our related news posts: COVID-19 | Premises No Access in Emergency Rent Relief and Retail Property Focus© Hawke’s Bay | April 2020
Turley & Co Turnover Leases View
Turnover leases occasionally apply for hospitality tenancies, for supermarkets and trade retail stores like Mitre 10 in NZ. Rent additional to a base rent is triggered by retail sales over a certain level.
There are turnover lease pros and cons – for a retail property challenges solution, turnover lease settings would be key. If the retail sales performance necessary to trigger additional rent was set too high, landlords would unlikely agree. A certain rent level is needed to support retail property investment and for retail locations to prosper. Rent level relative to land and building costs is key to retail districts renewal.
The turnover rent tenancy model has potential as a “shared pain and shared gain”, retail leases basis for Hawke’s Bay and elsewhere in NZ.
UK article 7 May on retail turnover leases:
By Jessica Newman, Sebastian McCarthy | Thu 7 May 2020
“The already tense relationship between retail landlords and tenants deteriorated further when the government temporarily banned landlords from taking legal action against occupiers over attempts to slash rents or take payment holidays.
Landlords slammed the new legislation, which will last until 30 June, claiming that some occupiers would just try to exploit the rules to avoid paying rent.
But retailers say they need such protection if they are to survive, and some are now going further and reigniting the debate over the very nature of the retail lease itself.
“The old leasing model is finished,” Michael Murray, Mike Ashley’s property chief and future son-in-law, told The Sunday Times. “We need to move to a modern one based on turnover, which reflects the decline on the high street.”
So will Covid-19 do what the retail crisis has so far failed to and prompt a fundamental rethink of the retail lease – or will the debate last only as long as the lockdown?
For many retailers, the lockdown has already been the last nail in the coffin. Last week, the Oasis and Warehouse Group confirmed it is to close all its stores and online retailing with the loss of more than 1,800 jobs. The likes of Laura Ashley, Debenhams and Cath Kidston have also fallen into administration and closed swathes of stores as a result of lockdown.
Retailers on shaky ground
Several others appear to be on shaky ground. Mobile phone retailer Carphone Warehouse has shut all its stores and John Lewis (pictured) says it may not reopen all of its stores after the lockdown.
With so many high-street stalwarts fighting for survival, retail expert Richard Hyman thinks the move towards more turnover-based rents will “definitely happen”.
“I don’t think landlords have a lot of choice. Twelve months ago, we’d have said there is a Premier League of landlords, and right at the top you’ve got floor space that will always be in demand. I don’t think any floor space will always be in demand after this crisis.”
“Having turnover-based rents doesn’t mean you have leases with break clauses every week, but that leases are flexible for both parties. The question is, will the bloodbath force people to do things or will people sit down and work out a more positive kind of trading relationship?”
Even if they did plump for the latter approach, many landlords are not convinced it would work.
Turnover-based rents are a noble thing to ask for but difficult to achieve
Martin Roberts, Addington Capital
Martin Roberts, principal and co-founder of Addington Capital, which owns several UK shopping centres including Charter Walk in Burnley and The Harvey Centre in Harlow, says: “It’s a noble thing to ask for but is very difficult to deliver. For example, retailers tend to be reluctant to share sales figures with us, so how would it work?”
Roberts says any change in the leasing model is likely to require a framework agreement between the British Retail Consortium, on behalf of retailers, and the British Property Federation, acting for landlords.
“If you could get buy-in from the top 10 landlords and top 20 tenants, you might have the momentum to get that moving,” he says.
The chief executive of the British Property Federation, Melanie Leech, also has her own concerns. “In many cases lenders, property owners and their tenants are already working together to find solutions, which may include measures such as turnover-based rents,” she says.
“However, this requires a true commitment to partnership and transparency where retailers are open and willing to share their financial data.”
The new stresses being put on the landlord-tenant relationship certainly don’t help. But difficult though a transition to turnover-based rents may be, the terrible impact of Covid-19 could well give retail landlords no choice.”