Prior to the Covid-19 pandemic, turnover rent leases tended to be reserved for discount outlet villages and specialist retail units. Lockdown turned this position on its head. With retailers struggling to survive and landlords worried about voids, both sides looked for new ways to ‘share the pain’ (and potential gain) and turnover rent leases went mainstream.
With the worst of the pandemic now behind us, it seems turnover rent leases are here to stay. This has resulted in greater attention being paid to the detail of how such leases operate, with landlords and tenants having very different views on what should be included in turnover for the purposes of working out how much rent is due.
As internet sales now make up a large part of many retailers’ income, it is perhaps no surprise that landlords are seeking to include turnover resulting from click-and-collect orders as part of the rent calculation. Likewise turnover arising from internet orders delivered to customers but fulfilled from stock at a particular store.
There is also the issue of where turnover resulting from stock moved between stores to fulfil orders should sit: with some stores effectively operating as mini distribution hubs, it is no longer just traditional sales that determine whether a store is profitable.
The question of what is fair arises a lot. Are customers only buying from a retailer online because they know they can pick their purchases up from a local store, or is this purely coincidental? Shouldn’t landlords just be grateful that increased footfall results from these types of orders? Even where a compromise can be reached, not all tenants’ accounts are set up in such a way that easily allows them to report turnover on the basis agreed in their new leases.
These are the key questions we are now grappling with, but they are the tip of the iceberg in terms of modernising pre-Covid lease drafting. Landlords and tenants will need to retain the collaborative approach they used during lockdown if they are to navigate their way to new leases fit for the modern world.
Vicky Hernandez is a partner and head of retail at RWK Goodman