How can landlords adapt to a changing high street? Keystone Law

Jessica Paige 15 February 2021 (Last Updated February 15th, 2021 17:12)

Retail expert and UK-based national law firm Keystone Law property partner Rima Gasperas tells Retail Insight Network how the high street is changing with the rise of more ethical independent and specialist stores and what this means for landlords.

How can landlords adapt to a changing high street? Keystone Law
Rima Gasperas, Keystone Law.

The high street has been constantly changing ever since the concept of high street was even invented. Retail expert and UK-based national law firm Keystone Law property partner Rima Gasperas tells Retail Insight Network how the high street is changing with the rise of more ethical independent and specialist stores and what this means for landlords.

The decline of the high street

Much has been quoted in recent times about the decline of the high street, exacerbated by the lockdowns during the current pandemic where experts have speculated that many non-essential shops currently closed will never re-open once restrictions are finally lifted. Although this may be true in some cases as we depressingly read of the decline of large department store retailers like Debenhams, this is nothing new.

Certainly, since the 2008 credit crunch and the recession that followed many shops that we knew as we grew up have now disappeared. In 2008, we noticed a steep decline in the number of shops in the high street often replaced by charity shops and as solicitors specialising in retail, we started dealing with insolvency and administration and regearing of leases where rents were reduced, linked to turnover or simply not paid; every rent payment quarter day it seemed another large well-known retail business had gone into administration.

Changing ethics on the high street

Since the crisis of the credit crunch of 2008, our view of the world and shopping has noticeably changed. We are much more aware of what we buy and with the continuing and ever more urgent climate crisis, consumers want to know where the product was made, how far it has travelled and whether it is recyclable.

We are also conscious of working conditions and want to know the companies that manufacture and pack the products that we buy have systems in place to protect its employees from exploitation, terrible working conditions, and low wages.

With all this, some retailers have been slow to adapt. However, there may be a phoenix from the ashes. In many areas, small independent businesses have started appearing in town centres; these boutique businesses focus strongly on sustainability and the ethics of where the products they sell have been sourced and manufactured.

These ethically minded businesses are also much more social media savvy with many starting online only, such as through Instagram, where they build up a following so that by the time they are ready for bricks and mortar property, they are more aware of the way their business will develop.

Location is also important, as part of a sustainable business model the local community is served with businesses working together as part of a forum supporting and often promoting each other with less emphasis on competition. This approach has proved successful in small pockets in towns across the UK.

What this change means for landlords

With all this change, what would this mean for landlords and the way retail leases will be negotiated in the future?

If the current trends continue, the days of long shop leases of 10 years – with a five-yearly open-market upwards-only review with rigid use and underletting clauses – could become a thing of the past. Landlords will have to adapt to avoid a long-term empty unit as these leases will be shorter and have a more flexible use, so the ability to share occupation with other complimentary small businesses will become popular.

Such sharing arrangements will have to be more flexible, thus avoiding the creation of a protected underlease, often feared by landlords and their lenders. It could be the retail equivalent of “hot desking” where short term licences of part of a shop are granted to businesses just dipping their toes into the idea of having a bricks and mortar shop but not quite ready to take on a lease themselves.

Similarly with rents, the fixed annual rents paid quarterly by retailers which are topped up when turnover reaches a certain level will be unacceptable to these smaller retailers; turnover-only rents payable monthly in arrears will be more popular and based on a percentage of an agreed minimum turnover.

Such rental arrangements have been around in retail leases for some time and so are not a new concept and, although not an ideal situation for a landlord, it may be the only suitable option for new tenants.

If turnover only rents become the standard, landlords will have to work with their tenants as if an investor in their business themselves and may find themselves supporting them much more than the usual landlord and tenant relationship, the reward being an increase in turnover and ultimately the rent.

Shared occupation leads to lower business rates

Finally, a short word on business rates. Many tenants find these crippling and at times higher than rents themselves. The model I discuss above with shared occupation may mean that the occupied square footage could fall below the business rates threshold, so the removal of this additional outgoing should be a welcome benefit to smaller business.

There will of course always be landlords (and their lenders) that won’t agree to this approach and the traditional form of lease with quarterly rental payments in advance will not disappear any time soon.

Nor are we are seeing the total demise of large shopping centres – the cause of many a small business’s failure in the 1990’s – but this quiet, small ever-increasing revolution towards the ethical high street will pick up pace and may be one of the few positives to come out of the chaos caused by the pandemic.