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Footfall Rent: It's Either This Or We Throw Water Over Landlords And Tenants

Posted on Oct 12, 2020. by NTI

When does a skirmish become a scuffle? When does the rivalry between two brothers become something more sinister? In the latter example, is it when one brother locks the other in a tumble dryer and switches on a long cycle? When the British Armada of 127 ships left home for the two week journey to liberate the Falklands (the hourly news of its progress almost certainly destroying the element of surprise) it was officially termed a 'conflict' and definitely not a 'war'. Apparently, it was all about making a 'declaration', which was very important, and at the time was endlessly debated not only in newspapers and on tv, but crucially in London taxis across the perspex divide between passenger and racist.

How do we properly describe the contretemps between tenants and their landlords? When does a melee become a battering? The move to turnover rents has become de rigeur (when does 'de rigeur' become pretentious? Is it when is typed into an article, when the author is not French?) and has started many a virtual conversation. There is nothing particularly new about turnover rent. Landlords typically establish a base rent of around 80 per cent of open market rental value, with the remaining 20 per cent based on turnover. Whilst it is difficult to see landlords agreeing to lose that guaranteed rental income entirely, we can expect to see it perhaps drop to closer to 50 per cent with the remainder of the rent based on sales, which has been happening quite literally all over the shop in the past six months.

In that situation the negotiation escalates quickly to the contentious point about how (and if) to include online sales which, it is argued, have nothing to do with a physical store and should not be included in the calculation. The landlords come back with, 'whoa, whoa, whoa, this means that the agreed rent does not account for click and collect sales or the handling of returns in store' ... and both those definitely involve physical premises, and the rent of those premises should include that element.

The 'reasonable' in us here in the NTI newsroom suggests that there needs to be an open and honest relationship where retailers provide landlords access to detailed financial and footfall information: usually a daily sales report together with monthly audited reports. One of the broadsheets reports today that Colliers International, the property agency, and CACI, a data consultancy, are ruminating about a model that could help smooth relations between landlords and retailers once the Government’s ban on property companies taking recovery action to collect rent ends. The landmark case of New Look included some landlords accepting as little as 2 per cent of turnover and they locked themselves in tumble dryers as a result of that one.

CACI (which really has to revisit its acronym and come up with something that sounds less poo-like) has devised a model that would factor in footfall, uplift in online sales following the opening of a store, the value of items bought online and collected in-store, and store sales. All of this involves loads of numbers, lots of review and tons of reporting. Colliers is working on a 'cost per click' model that would see rent linked to passing footfall, dwell time and customer spend.

The sticking point in this is the multi-billion pound elephant in the shop window. Landlords don't want their premises bordered on both sides by empty outlets and tenants know when they have their old adversaries' goolies in a vice, but both sides will have to work out how to settle billions of pounds of rent arrears which have accumulated during the pandemic.

Andy Bruce, head of real estate at Linklaters, the law firm (which means he is very, very rich but has a heart the size of a beachball), said: “Retail property generally has changed to be a different asset class. Turnover leases for investors are a bit like being a shareholder in the tenant. It’s not a traditional real estate investment. There are different metrics to consider and if there was an industry standard for how turnover rents were calculated that would help with transparency for investors.”

Okay Andy, what is the solution then? How are we going to get landlords and tenants to agree with each other without throwing water over them and sending them to their rooms?

 

 

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