Retail turnover lease revolution being held back by ‘trust issues’

Related Topics
Lease agreement

A move to a new form of turnover-based commercial property leases which better suit the operational needs of UK retailers and leisure operators is being held back by ‘trust issues’ around data sharing between landlords and occupiers.

A survey of retailers and F&B operators who occupy more than 11,000 stores across the UK has shown that there is overwhelming support for a move to turnover-based leases.

But there is an element of distrust on both sides around how revenue data should be shared and used - despite there already being a successful model for their operation in the outlet centre retail sector. At highly successful outlet centres such as the London Designer Outlet at Wembley and Bicester Shopping Village, turnover leases have been the norm for many years, but they require precise data collection and analysis which, in turn, shapes the active management of centres.

In a survey by specialist asset manager, Total Turnover Solutions (TTS), 80 per cent of the 31 major brands and F&B operators canvassed, indicated support for a move to a revenue-responsive approach to leasing. Only 8 per cent of respondents said turnover rents were not suitable for their business and this was primarily due to businesses with showrooming operations.

TTS co-founder Mark Phillipson says: “The majority of brands and operators who want to move to turnover leases said they would be willing to supply revenue data to landlords if the process was secure, easy to use and their businesses could benefit from aggregated data perspectives about locations and be able to apply that intelligence to inform their future trading projections and performance measurement.

“For occupiers, turnover leases help de-risk their property liabilities and for landlords, they provide stable income in the form of the base rent with an additional revenue-responsive income stream which they can help boost through active asset management.

“However the elephant’s head in the room is that some landlords are concerned that occupiers may misrepresent turnover levels for their own advantage while some occupiers feel that turnover data may be used against them in some way.

“These ‘trusts issues’ around turnover leases must be addressed at once if we are to successfully rebuild the UK retail and leisure sectors after the trading damage done by the pandemic.”

The research says that this distrust has been heightened by the portrayal of some of the lease structures proposed as part of recent CVAs as being ‘turnover leases’. In reality, these proposed structures rarely, if ever, provided any of the features required of a successful turnover lease.

The survey reports also highlights that, at present, the majority of landlords do not have the data infrastructure or asset management expertise to accommodate a switch to truly pro-active turnover-based leasing.

Dan Mason of TTS comments: “Without this rigour and active management then there can be distrust on both sides regarding the veracity of turnover data and how it is used. 

“That such a large proportion of occupiers are amenable to moving to a lease structure which can provide potential upside for the landlord is very positive news for property investors.

“The turnover rents must be set at a sustainable level that responds to an occupier’s particular margins and effort rates. However, it is also important that the leases stipulate a level of base rent that underpins the long-term investment and funding requirements of assets.

“These key characteristics of a turnover-based lease are an essential step towards creating assets which can be accurately valued and are therefore investable. It’s a model which has worked very successfully for the owners of UK designer outlets and their occupiers during the past 25 years, and the ‘full price’ sector should follow this example.”

Through its experience of operating turnover leases for more than 20 years, TTS has created a platform that brings together data infrastructure; occupier performance analysis; and bespoke asset management strategy to assist landlords in the successful implementation of revenue-responsive leases.

Author Profile