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How can landlords adapt to the new reality of retail?

Almost every week we seem to see another retailer reporting a set of disappointing, and sometimes downright dismal, results.  Staff cuts, store closures and profit warnings are the order of the day for many of our high street favourites. Anna Turnell, retail property specialist in Lodders’ Real Estate team, explains how landlords can adapt to the challenging climate.

In the second quarter of 2018 the RICS UK Commercial Property Survey noted a sharp fall in tenant demand and investment enquiries across retail, with 70% of contributors expecting investors to scale back exposure to the sector given the rising usage of Company Voluntary Arrangements (CVA) (a form of insolvency).

One in ten town centre shops now lie empty.

With the recent closures of large high street retailers including Toys R Us, Maplins, Carpetright and Coast; House of Fraser announcing that it is shutting over half of its stores by January 2019; and Debenhams issuing yet another profit warning, the current retail climate speaks for itself. To keep premises occupied, retail landlords must show flexibility with their tenants, and find alternative solutions to empty shops.

The rise in online shopping and increased cost of imported goods are just two of the many factors contributing to the high street troubles. The high street retailers that are thriving are often those with a service aspect – opticians, chemists for example – and those with less exposure to online trade, such as the discount stores and hot food takeaways.

With poor profits being reported throughout the sector by established retailers, tenancy negotiations are proving to be difficult, with larger retailers pushing for significant rent reductions. Landlords are, effectively, being forced to cut costs to prevent losing valuable tenants.

How can retail landlords adapt to the current climate?

  • Keep lines of communication open with your tenants. Successful relationships depend on working together and, if landlords can demonstrate short term flexibility then this may ensure the long term survival of the retail client.
  • Consider shorter term licences to occupy or leases with regular mutual break clauses. This flexibility may be more suitable for smaller/independent retailers who could fill the space in the short-term but cannot commit to being tied into a lease for long and gives landlords the opportunities to end the lease for a larger or longer-term retail client.
  • Allow your tenants to pay rent monthly rather than quarterly, as finding 3 months rent in advance can often cause tenants cash flow problems.
  • Allow rent reviews to operate both upwards and downwards (to reflect the current market) rather than the traditional ‘upwards only rent review’ which can be off-putting for tenants.
  • Review floor space and consider breaking up large premises into smaller units so that at least part of your property will be let, if not the whole.
  • Build in a leisure offering. Consider food outlets, coffee bars, event space and other attractions to increase footfall and support your retail tenants.
  • Pop up shops. These are an increasingly popular short term solution for landlords awaiting a more permanent tenant, particularly in the lead up to Christmas. In Stratford upon Avon, Bell Court is successfully creating a vibrant pop-up shopping area with units let on a very short-term basis (usually by licence to occupy rather than a lease). Other towns have seen landlords giving units over to charities or events companies to create a short-term presence and increase footfall.

How we can help

It is undoubtedly tough times but, with some sensible and commercial legal advice, landlords can strike the right balance between attracting retail tenants and retaining sufficient security.

Lodders Solicitors can talk you through the various options for break clauses and other flexible lease terms and put in place licences to occupy or leases that are structured effectively and suit your needs. The days of long lease terms with no breaks clauses have most definitely gone, but it need not all be doom and gloom.

For specialist legal advice on your retail property portfolio, contact Anna Turnell.

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Get in touch

For specialist legal advice on your retail property portfolio, contact Anna Turnell on 01789 206169 or by email.