Turnover-based rents: co-operation with mutual benefits

Turnover-based rents: co-operation with mutual benefits

10 Jul 2020

Turnover-based rents in the retail and leisure sector are not new. But read the media in recent weeks, and suddenly they seem to be everyone’s favourite route forward for the post-coronavirus world.

We’ve been using turnover-based rents at London Designer Outlet, the capital’s leading fashion and lifestyle outlet centre, since we opened almost seven years ago. Indeed, the benefits had proven to be so strong, that this is the go-to lease for Quintain across the remainder of the retail and leisure at its £3bn transformation of the 85-acre Wembley Park.

So, let me give you my views of turnover-based rents from the perspective of someone who has seen the benefits close up for many years.

I’ve read the criticism in the media from landlords who say “We have our own business to run, why should we run the retailers’ businesses too?” This fundamentally misses the point.

Because turnover-based rents are so closely aligned to the performance of an individual store or restaurant, they create a symbiotic relationship between landlord and tenant. In good times, both parties benefit; in less favourable times, both are incentivised to seek improvements. As a result, the team at LDO has a really healthy working relationship with our tenants, whether global brands or UK-only retailers.

It means we’re in-tune with retailers and, in turn, with visitors. As a result, we can look to enhance the experience for our guests throughout the centre and iron out wrinkles that might spoil their enjoyment. For example, it led to the introduction of hands-free shopping over a year ago. We were the first UK shopping centre to offer Dropit, the app-based, store-to-door delivery service. Guests that use this service generally spend more, benefiting the retailers, because the challenge of carrying shopping bags home, or back to their hotel, is removed.

The coronavirus retail lockdown has shone a bright spotlight on landlord-tenant relationships and the obligations under their leases. From the beginning with Wembley Park, Quintain put emphasis on the relationship with tenants as a partnership.  The turnover-based rents model had inbuilt resilience in poor trading conditions – not that anyone could have envisaged the approach of Covid-19. It meant that the financial burden on tenants was mitigated as the turnover element of leases became irrelevant, providing a clearer start for renegotiations.  

The result has been a robust tenant mix with almost 80 per cent of our retailers reopening on Monday 15 June including Nike, Levi’s, Puma and Adidas. The remainder have now reopened, plus the restaurants in early July, in keeping with all the Government guidelines, enhanced with plenty of our own local initiatives. We worked with every tenant to agree individual health and safety plans and procedures, further demonstrating the strength of the working relationships.

I believe the future of rents in the retail and leisure sector will change considerably in the post-coronavirus world. The commercial arrangements between owners and occupiers will rapidly move away from quarterly rent payments and regular upward-only reviews. It is shifting the viewpoint away from simply a matter of what rent a landlord can get for a given unit and what yield can be realised. Instead, the focus is moving to a stronger consideration of the overall tenant mix, a better understanding of potential revenues for each retailer and, in a sector adopting more experiential attractions for customers, there is greater thought to how a tenant will add to a memorable day out for all guests.

Having worked with leases where the turnover element promotes such strong partnerships for seven years, we have seen the many benefits. I understand why some asset managers are now seeing them as an essential component of forward-thinking leases for the post-coronavirus world. They create stronger landlord-tenant relationships because of the mutual benefits. Both gain in good times and are incentivised in adverse times. This deeper understanding of tenants’ needs can lead to innovations that benefit all tenants and guests. At a time that other landlords have been less supportive, the sense that “we are all in this together” has engendered more productive renegotiations around tenants’ terms going forward. That’s why I would argue that turnover-based rents are the best solution for the future of the retail and leisure sectors.

Sue Shepherd is Realm’s General Manager for London Designer Outlet

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