June 04, 2020

Will retail still be therapeutic post-lockdown?


As we slowly start to ease out of lockdown, the impact of how the retail landscape will be changed, remains to be seen.  Some retail stores are starting their preparations to be ready to open again in England from 15 June 2020, however there are a number of factors that store owners will need to take into account:

How will shopping as we know it, change?

  1. The Government has made clear that social distancing must remain in place for the foreseeable future, maintaining a two metre distance between people.The public are mostly willing to help enforce social distancing by queuing to be allowed entry into the bigger stores (e.g. supermarkets and homeware stores) due to the requirement of basic needs. What remains to be seen, is whether the average shopper will queue merely to visit a store on a casual basis, when they have no guarantee of actually buying an item, and no genuine necessity to do so.
  2. Many stores will be closing changing rooms, and asking people to try the items at home and return them if they are not suitable (meaning two trips to the same store). Stores will need to be able to ensure that any returned items of clothing, footwear and accessories will need to be left for a sufficient amount of time to ensure that any subsequent trying on carries no (or minimal) contamination risk. What may happen in practice is more consumers buy online for the ease of having the items delivered instead of visiting a store where they cannot try on items.
  3. Until the hospitality sector opens, shoppers may not opt for destination shopping, to large out of town centres or city centres, due to the inability to buy food, drink and access public restrooms. Shoppers are more likely to visit a shopping area once they can enjoy the whole experience.
  4. Whilst shoppers may be expecting large scale sales to entice them back into the shops, as the retail sector has suffered badly in 2020, retailers are perhaps unlikely to cut prices on stock when they first open.

  5. Part of shopping is the ‘experience’ and retailers are used to spending capital on the human psychology of shopping; store layouts, window dressing and timing of sales as examples. Due to the restrictions around social distancing, and with queuing and reduced access, the days of impulse buys and browsing suddenly could become a full day’s activity and for the time-poor shopper, this may deter them from visiting. One way systems and floor markings may also detract from the enjoyment of shopping, resulting in possibly fewer customers.

Lease Considerations

In respect of the landlord and tenant relationship, there are some areas that both parties will need to give some thought to over the coming months, to ensure a good working relationship between the parties. Whilst not an extensive list, some areas to think about are set out below:

  1. Keep open clauses – these are useful for landlords in order to (1) ensure that a parade of shops, or centre remains attractive to the customers, and (2) encourage maximum footfall and therefore, maximise potential turnover rents, for the landlord.With social distancing measures in place, staff shortages due to health and safety and the ability for only a certain number of people to be in a store at any one time, retail owners may choose to limit the times of opening of their stores to maximise revenue at key times, whilst cutting back on paying employees for hours where they are not needed.
  2. Alterations – various internal alterations will be required to ensure that the staff and customers are kept safe, by possibly erecting glass partitions, new electronic payment capabilities and removing or closing the changing rooms.Whereas most tenants will likely need their landlord's consent to carry out such works, they are unlikely to agree to paying significant landlord’s fees for a new licence to alter, to carry out works that are necessary for them to safely open the stores and to comply with Government requirements for social distancing.Such works will be needed imminently, and it may be that tenants just carry out the works and seeks retrospective consent, a process which makes sense commercially but potentially exposes them to claims for breach of their lease.
  3. Statutory Compliance – whilst most leases contain obligations on the part of the tenant to comply with law, this is usually wider than just property law and extends to complying with the employers' obligations to their employees.Tenants will need to ensure that not only are their premises safe for customers, but that their staff have in place appropriate protection measures to allow them to operate and keep safe (for example, protective screens at payment counters).

  4. Rent concessions – whilst a number of retailers have asked for monthly rents, or deferred payments during the time of non-trading, what remains to be seen is how the June quarter rents will be treated.We expect another round of rent concessions or deferrals to be granted by landlords, but the effect on turnover rents remains to be seen once the retail stores re-open shortly.

  5. Turnover – there is much talk about turnover leases becoming the new norm in the retail sector, but if there is reduced footfall due to social distancing, then it remains unknown how this would work in reality. Is it really 'sharing the pain' if the tenants' headline rents decrease, but reduced footfall means lower turnover income and so then there is no top up payment to the landlords? Perhaps we will see more linking of turnover rents to online sales, or more nuanced turnover rent calculations.

The Government has recently proposed a code of practice between landlords and tenants in the retail sector to clarify the position in relation to rental payments.  It would be interesting if the ambit of the code could be extended to also provide guidance on other landlord and tenant matters which are relevant to safely operating premises open to the public in the post-lockdown world.

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