Service: Probate and estate planning

Sector: Property

Landlord and Tenant Relationship – The Future

By Richard Kleiner

09 Sep 2020

Several articles have been published recently in the financial press and, even more significantly, in the real estate press, regarding the evolving dynamics of the landlord and tenant relationship. In response to these and their suggested changes, what does the future look like?

Following the lockdown caused by the Covid-19 pandemic, the landlord and tenant relationship has certainly changed. In many respects, it has become quite prickly due to many tenants unable, or in some cases refusing, to pay their rent demands. To support tenants, some landlords have been pragmatic and agreed rent free periods of between three and six months. Sometimes with the grant of an additional reversionary lease to be tagged to the end of the existing lease. However, other landlords have not had the means to be quite so accommodating.

The turnover lease

Many commentators have predicted that the turnover lease may well become something of a standard going forward. However, with the continuing demise of the high street and shopping habits generally, is the turnover lease fit for purpose? 

The Office for National Statistics reported that the proportion of online spending has increased from 20% in February to over 32% in May. In addition, weekly expenditure by consumers increased from £1.5billion in February to £2.5billion in June. Accordingly, the widely held view is that shopping habits have permanently changed and will continue to change.  

Whilst it may be the case that retailers will still want to have a high street presence; this could well be merely as a “shop window”. Not just in the literal sense, but also to perhaps offset marketing costs. I can see a situation where consumers will go to a traditional shop, and whilst they will be able to touch and even try on the merchandise, the ordering and purchasing will be done online (perhaps from within the shop itself). Then, hopefully, by the time they return home, their goods will have already been delivered, probably by a drone or some other logistics method.

Clearly, tenants in the retail space would not want to enter into a turnover lease where the bulk of their sales are actually online. Therefore, as predicted by many commentators, in an effort to reach an economic equilibrium between landlord and tenants, landlords may end up with an equity stake in many of their tenants’ businesses. If this should happen, in regard to turnover rents, landlords will need to educate themselves on the retail industry and the way that finance works to draw up an appropriate lease. It seems only right and appropriate that landlords share downside risks when the tenant is shaing upside potential.

Landlords will need to carefully test assumptions and scenarios, including the modelling presented to them by retail tenants, which may include a review by an external an independent third-party auditor. In this way, landlords would be much more supportive of the changing methodology behind how the retailer’s business operates and unperturbed as to whether turnover is generated online or otherwise.

If this new state of affairs is the future, then clearly a partnership with private equity may also be necessary in order for landlords to have a clear exit strategy around how they can realise their equity stake.

It will be interesting to see how the landlord and tenant relationship continues to evolve over the next 12 months. I will be keeping a close eye and sharing any updates on our insights page. 

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