In our Industry Insight, Peter Allinson, Chief Executive of real estate law firm Davitt Jones Bould, explains to us what global retailers need to know about entering the UK amidst all the changes to the market in recent times.
In recent years, the impact of Brexit, the Covid-19 pandemic, tensions between physical and online retail space, rising minimum wages, inflationary pressures and business rate revaluations have caused seismic shifts in the UK’s traditional bricks-and-mortar retail landscape.
In response, the UK’s most forward-thinking occupiers are adapting and innovating fast – recognising that the power dynamic between consumers and retailers has permanently changed and embracing new leasing models and experience-oriented stores.
But what are the legal implications of the UK’s ‘retail revolution’ and what key things do businesses need to know when considering entrance or expansion in this quickly evolving market?
Owner-Occupier Relationships
In the UK’s changed, post-Covid market, owners are less hardline than previously in negotiating commercial terms with occupiers. Gone are the days of the “us vs them” mentality: today’s owners are far more open to discussions and flexible arrangements. They now take a collaborative, partnership approach and are much more willing to establish a deal that works for both sides.
A Rise in Turnover-Based Leases
One of the ways this partnership style of working manifests itself is through a rise in turnover-based leases, which are seen as a fairer option for both owners and occupiers. Under this model, occupiers pay an agreed annual base rent, with increases in turnover used to calculate uplifts in rent. When an occupier is operating successfully and generating higher income, the owner will therefore receive a higher rent.
The UK market is currently moving away from its traditional long-lease, fixed-rent structures and becoming much more familiar with this approach: almost all our retail clients with premises in shopping centres now adopt a turnover-based model, which is particularly popular among large institutional landlords.
Turnover leases provide increasing flexibility for retailers during difficult and uncertain times, while owners are more likely to engage with occupiers than they would on standard leases, since they have a material interest in their occupiers’ success and want to maximise the rent they receive.
Experience-Driven Retail
The retailers currently leading the UK market are those who understand they need to offer more than just sales, since this can easily take place online from the comfort of consumers’ own homes.
Instead, we’re seeing a rise in concept stores and alternative uses: units are being repurposed to make the art of live shopping more focused on service and experience over products alone.
This is demonstrated by Harrods opening ‘H Beauty’ stores with interactive make-up, skincare and fragrance stations, while at Nike, shoppers are invited to join sports activities or personalise sneakers and sportswear. Having a sharp focus on the legal ramifications of such changes of use can make the journey of repurposing much faster, simpler and smoother.
The Landlord and Tenant Act 1954
It’s critical that retailers entering the UK get their heads around relevant legislation – which can be complex, but can also work in favour of occupiers.
One such law is the Landlord and Tenant Act 1954, which was created to provide security of tenure to occupiers. Most occupiers automatically have the right to renew under the Act unless, before a lease is granted, they agree with the owner that the right to renew should not apply – known as ‘contracting out’.
However, the legal framework that underpins the Act is nearly 70 years old – the world and commercial leasehold market have both changed significantly in that time – and owners and occupiers alike report that aspects of the Act have become burdensome, unclear and out-of-date.
There is concern that parts of the Act stand in the way of modern commercial practices, causing unnecessary cost and delay for both owners and occupiers and preventing commercial space from being occupied quickly and efficiently.
To address these concerns, the UK Law Commission is currently undertaking a consultation on the Act to assess its suitability for today’s commercial leasehold market. Whatever the outcome, we look forward to guiding our clients through the intricacies of the UK’s commercial leasing system.
Delays to Leases and HM Land Registry
Many global retailer clients we work with have remarked that in the UK, processes like negotiating leases, dealings with HM Land Registry and even the court system can be convoluted and frustratingly slow.
Tools like the Model Commercial Lease – a template to create leases for commercial property – have helped speed things up, yet without good legal advice, commercial leases that should take between four-six weeks can often drag on for months.
Meanwhile, following the pandemic, HM Land Registry – the service to register ownership or occupancy of UK land and property – is facing significant backlogs, with registration currently taking between 12-18 months.
In recent years, we’ve been pleased to help international retailers such as Peter Alexander, Smiggle and Optical Center with their programme of UK entry or expansion – acting and advising on lease acquisitions, renewals and portfolio management.
Whether you’re a retailer entering the UK market for the first time or preparing to roll out a series of new UK stores, getting the right advice can make all the difference.
