More turnover-based rentals are now inevitable

Chatting to leading property player Roger Madelin recently, it was clear he was proud of the fact that in the early 1990s, when he was running property developer Argent, the company’s Brindleyplace project in Birmingham had been the first mixed-use site to introduce turnover-based rentals for retailers and hospitality companies.

He went on to use this innovative form of rental on the King’s Cross development and it will also play a major role in the Canada Water redevelopment that he now heads up for British Land. But although such forms of rental have been around for some time, they are hardly commonplace because landlords have tended to view them negatively.

Not only does it expose them to any downside in tenants’ trading but the uncertainty of this income makes it tougher for them to then value their properties and for the pricing of their debt obligations. It also strips away the comfort of the traditional long-term, upward-only rent review to that landlords have become far too wedded over the years.

The current circumstances have ridden a coach and horses through this scenario and retailers, along with leisure and hospitality companies, are now demanding changes to their lease arrangements. A survey undertaken in early July by Barclays found that among the leaders in the leisure and hospitality sector, 26% stated they would be having conversations with their landlords. Almost a fifth were looking to move to a turnover-based rental model and 15% wanted to move away from upwards-only rent reviews. 

Interestingly, 13% were looking to offer landlords shares in their businesses in exchange for rent. It is just this sort of innovative solution that Madelin expects to see more of in the industry as rent agreements become much more personalised to the individual tenants. This would follow what is much more standard practice for office tenants. 

The major property landlords have come to recognise the game is up for the present situation with historical lease arrangements. The likes of Landsec, Shaftesbury, Capco, Cadogan, Hammerson and The Crown Estate all intend to either include elements of turnover-based calculations in their rental agreements or introduce it on a case-by-case basis. 

Mark Bourgeois, managing director of UK & Ireland at Hammerson, neatly encapsulates the current thinking: “The traditional approach of basing rent on historical market evidence rather than long-term affordability has created tension between property owners and retailers at a time when partnership and collaboration is needed more than ever.”

Sadly this message has failed to get through to certain landlords. David Page, chairman of Fulham Shore – which operates the Real Greek and Franco Manca chains – reckons 85% of property owners are being “reasonable” while the remaining 15% are being “stupid and nasty”. The worry with this last grouping is not about any reluctance to introduce turnover-based rentals but is about their unwillingness to offer some sort of waiver, relief or lower rentals in relation to the backlog of unpaid rent that has built up over the period when many outlets have been closed.

Milk & Honey is one such business that is suffering from its landlord being in the unbending 15%. Despite its founder Jonathan Downey having paid the landlord almost £4m in rent over the 18-year lifetime of the bar, the property owner is unwilling to offer any relief on the unpaid rent and this is forcing the closure of the award-winning Soho bar.

It is clear the transition of the property industry to a more widespread use of turnover-based rentals will give operators the greater flexibility that their businesses have long required. This will represent a major help when times are tough and, for landlords, it will ensure they share in the upside when their tenants go through good trading times. 

Such an arrangement proved to be a success many years ago for Madelin and the Brindleyplace development but far too often the property is incredibly slow to make changes and adapt its models. It will literally take a pandemic.

Glynn Davis, editor of Retail Insider 

This piece was originally published on Propel Info where Glynn Davis writes a regular Friday opinion piece. Retail Insider would like to thank Propel for allowing the reproduction of this column.