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Clicks & Mortar: The marriage of the future and the past within a traditional retail lease structure - Part One

Multi-channel and Omni-channel retailing are, of course well established in the retail market.

Both, however are terms to which many retailers are starting to pay more attention as the rapid growth in online sales and headlines around the switch from 'Bricks and Mortar' to 'Clicks and Mortar' dominate the retail press.

For those that require a brief refresher, multi-channel or omni-channel retailing describes the shopping experience of a consumer who prefers to shop using multiple channels such as online stores, mobile app stores and retail stores in contrast to, for example, carrying out all their shopping in a retail store.

There are a myriad of issues for a retailer to consider when considering its multi-channel and omni-channel offer within the constraints of a traditional bricks and mortar letting. Unless approached by way of a clear cohesive strategy that is understood and, has the 'buy in' of the Landlord, these issues can eat up valuable time in negotiating-time that would be far better spent in trading the unit.

This article is one of two, which flags two often encountered stumbling blocks that can very easily trap the unwary and get in the way of an otherwise smooth lease negotiation. The first is turnover rents.

Turnover rents have been around for some time, and, are showing signs of increased popularity. A turnover rent is a rent that is calculated by reference to the turnover generated at the property. It is predominantly used in leases in the retail sector and usually only forms part of the total rent payable, being a 'top up sum" payable in addition to a discounted market rent

Many tenants, and indeed landlords, will have their own specific expectations about what revenue should and should not be captured under the definition of Turnover Rent in a lease. Retailers now are much more fluid in the way sales and orders are processed with in store order points allowing delivery to a customer's home address and online stores that allow a 'click and collect' or 'collect in store' offering. Some tenants may assume that an online order which is merely collected in store would fall outside the scope of sales to be included within the turnover rent. This, however, may not be the case and the specific drafting of the lease and the definition of turnover rent would need to be reviewed before any conclusions can be drawn.

A click and collect offering has potential benefits to tenants and landlords. The tenant benefits from offering an enhanced shopping experience to its customers and therefore (hopefully) improving brand loyalty and increased revenue and, the landlord benefits from an increase in footfall to its shopping centre. Depending on outcome of lease negotiations the landlord may also benefit from the increase in turnover generated from the click and collect sale.

In the past tenants have been relatively successful in negotiating provisions to exclude internet generated sales from turnover rent calculations. More recently, however, a hardening of attitudes amongst landlords keen to point out that a physical store derives discernible benefit from click and collect sales has resulted in an increase in time spent negotiating the point

Frequently, Heads of Terms will simply refer to a 'turnover rent of x% on turnover above a threshold value' being paid and at this stage, a tenant may not think about the intricacies of how the calculation will work in practice. Landlords and tenants alike should consider at the outset of the deal, what their expectations are in terms of what is 'included' and what is 'excluded' from turnover and, this should be reflected in the Heads of Terms.

From a tenant's perspective, it is also crucial to ensure its central reporting systems allow it to comply with the reporting obligations associated with turnover provisions in the lease. Many leases contain penalties (which can be substantial) for non-compliance and which often accrue on a daily basis. Such penalties can soon amount to a sum large enough to have a detrimental impact on profitability. Whether or not these "penalty" sums are enforceable is a subject to be discussed elsewhere. Neither party however will relish a dispute on a point that could easily have been avoided by decent communication and forward planning at the outset of the deal.

To be discussed in 'Clicks & Mortar: The marriage of the future and the past within a traditional retail lease structure - Part Two' - Collecting Consumer Data.


This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2022.


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