RENTAL payments based on takings may become more common as retailers adapt to the changing face of the high street, a commercial property expert believes.
Martin Bennett, a Director in the Commercial Property team at Scottish legal firm Lindsays, says the option is one available in negotiations as shops seek a cost-effective way to retain a physical presence in town and city centres.
While normally only used in cases of large shopping centres or retail parks currently, he believes it is one with the potential to grow as retail tenants consider how to best adapt their models in response to the rapid rise of online shopping and as landlords seek assured long-term use for the buildings they own.
Mr Bennett said: “The face of our town centres is changing. They are evolving into places where we shop, work, visit and live. Retail is an important part of that mix.
“But online shopping has changed the dynamics. There’s no avoiding the challenges that’s created and the shop closures it has triggered. This means the more flexibility retailers have in terms of fixed payments – which include rent – the better.
“One way of doing that is to have an agreement in place where some of the rent they pay for their premises is based on turnover. You have a lower base rate of rent, but the higher the turnover, the greater the amount paid on top of that.
“That gives the tenant a greater level of assurance. And, while there is a risk for a landlord that they might not achieve full market rate, the chances of retaining a longer-term tenant is greater. Lower rent can often be better than none at all.
“This will not be suitable in every circumstance, but for a number of retailers it could increase the viability of their business.”
Mr Bennett, who has more than 20 years of experience in advising both retailers and landlords on commercial property deals across Scotland, says the coronavirus pandemic and the cost of living crisis have highlighted the need for both parties to maintain honest, open relationships to adapt to shifts in the market.
Many retailers who have not already done so may well now be thinking about exercising any break clauses in their leases.
By doing that, Lindsays lawyers say,retailers may be able to negotiate better terms with their landlord to stay in their existing premises, including a change to a base and turnover rent scenario. Alternatively it could allow them to move to smaller, more affordable premises. They may even close their physical high street presence completely and move purely online.
Decisions post-Christmas trading may also be a factor as it is likely the cost of living crisis may adversely affect the usual Christmas spending habits of many customers.
The lawyer added: “Our town and city centres are evolving – and the calls for people to support businesses in their community have never been stronger.
“Shopping in-person is an experience people still want to enjoy. But there’s no escaping the fact that the demands of consumers are changing. Businesses are evolving with that. With the right units and the right proposition, however, interest is still there.
“People want to see a greater mix of businesses in their communities – independents as well as national retailers. A broader range of rental models can be a factor in unlocking that. Landlords and tenants are well advised to be open to negotiation.”