As the high-street and leisure sectors continue to struggle amid the pandemic, many tenants are putting pressure on landlords to move to turnover based rents alongside additional or longer periods of rent-free occupation. In a challenging landscape this grappling of power between retail tenants and their landlords is likely to become the new normal.
On the back of the growing popularity of Company Voluntary Arrangements (CVAs), in August 2020 New Look made the bold move of requesting a switch to turnover rents on 402 of its stores and nil rent on 69 of its stores, as part of a CVA proposal and national restructuring project to enable the high-street retailer to survive the current storm. This week it has been revealed that British Land and Land Securities are amongst a number of landlords who are challenging New Look’s creditor-approved CVA. The challenge, which is limited to a handful of landlords, comes as a crush to New Look’s financial restructuring plan amidst a second lockdown which is likely to cause further difficulties for the already distressed retailer.
Turnover rents have been adopted by many retailers in the past, particularly under CVAs, however never on a similar scale. For New Look, this approach was proposed to avoid the fashion chain from heading towards administration and the potential loss of 11,000 jobs. As a sop to landlords, the CVA proposal did include greater flexibility for landlords to terminate New Look’s leases if (and in the current climate it is a big ‘if’) they could show that they would be able to achieve improved terms in the market. New Look’s aggressive move is indicative of the wider market where retailers are pushing to redress the balance between tenants and landlords which has traditionally sat in favour of the latter, however the recent challenge shows landlord’s won’t sit back and accept the changes readily.
The turnover rent model provides a level of partnership between landlords and tenants and promotes risk and reward sharing. Although historically less common in the UK, percentage-based rents are much more common in the USA, Asia and parts of Europe. Turnover rents create a mechanism that reduces the rent burden on tenants when trade is slow but brings a reward to the landlord when profits are up. The traditional upwards-only rent position in most institutional leases provides little to no flexibility for tenants in a fluctuating market. On the other hand, turnover rents can make it harder for landlords to satisfy their obligations to their lenders or shareholders and may cause difficulty in assessing the value and strength of a property portfolio. However in order to achieve long-term stability on the high-street, a more collaborative approach to rent is likely to be established. Use of turnover rents requires a collaboration and sharing of data by tenants which is currently rarely required, and the inclusion of internet sales (including the vexed question of how to attribute ‘click and collect’ sales) and refunds will be crucial to both parties during negotiations.
2020 has seen the emergence of some voluntary or enforced benevolence from landlords as many have accepted rent free periods and/or rental deferment. Despite this, a longer term agreement to turnover rents is a significant change to the status quo. However, where rental mechanisms reflect the actual performance and success of a business rather than ever-increasing rents that may drive retailers away from traditional bricks and mortar, turnover rents may be the fairest solution to enable both short and long-term success in a sector which has been on rocky ground for quite some time. New Look’s battle over its CVA will continue with what is rumoured to be four main challenges. On the background of a darkening sky for retailers the next few months aren’t going to be smooth sailing for the fashion retailer.