Retail tenants putting the heat on landlords

There is a battle royale looming in the retail sector and while its not directly related to Amazon, it comes about because of online shopping.

The angst is that in amending the Retail Leases Act, which came into effect on July 1, NSW has become the first state to legislate that online revenue be excluded from turnover calculations.

But, as with a lot of legislation, it is not national, yet the country’s biggest retail landlords all operate in every state. Queensland updated its legislation in 2016, though did not address the e-commerce issue, while there is no mention of online revenue in the Victorian Retail Leases Act 2003.

In NSW, the amendment to the Retail Leases Act 1994 says that turnover rent excludes online revenue except where the goods are delivered or provided from the shop, or the transaction takes place while the customer is at the shop.A tenant is not required to provide information to the landlord regarding online transactions except where the goods are delivered or provided from the shop, or the transaction takes place while the customer is at the shop.So, the issue is, as more stores sell online, how do the landlords get a cut of the action and stop the online sales revenue leakage?

Kate Warwick, the senior managing director and head of retail and consumer products and Glen Smith, managing director, real estate advisory, from FTI Consulting said that retail leasing is fraught with conflict. They said the tides were turning in favour of tenants, but they expect landlords won’t take long to react.

On one hand, landlords desire certainty of income and to maximise the value of their investment. On the other, tenants commonly want to minimise their overheads and ensure their rent reflects the performance of the store.

Jacqueline Burns, the managing director of Market Expertise, says a compromise of sorts has seen various forms of turnover rent clauses negotiated into a range of retail leases over the years, in particular for supermarkets, department stores, and larger specialty store networks in shopping centres, whereby the tenant would generally pay a fixed base rent, plus a variable ‘turnover’ rent component directly linked to annual revenue performance.

Traditional turnover rent clauses worked effectively when we all shopped conventionally in-store. There was no disputing a retailer’s turnover and little debate about the definition of the term “turnover”.

However, in an era where we are increasingly shopping online, are turnover clauses still relevant? Many retail landlords will not yet have had the opportunity to address the impact of online sales, particularly for longer term leases, and how they are impacting store revenue and therefore turnover rent payable.

With Amazon soon to arrive in Australia, the amount spent online is poised to increase, especially as Australia’s online sales penetration is lower than similar Western economies, and there will be fierce competition for the traditional in-store shopping dollar.

Ms Warwick and Mr Smith said landlords will now seek to future proof their leases and, for longer leases, and may seek to include provisions that allow for a periodic review of any turnover rent mechanism, to ensure it remains relevant and reflects market conditions through the course of the lease.

“Landlords will become more focused on arresting revenue leakage and will look for ways to attribute online revenue to physical stores. Traditional or ‘all inclusive’ turnover definitions may become a thing of the past. Landlords and tenants will be more focused on defining terms such as turnover, and on expressly negotiating what is and is not included in turnover,” they said.

“Landlords will request that tenants disclose accounting information regarding online transactions in support of turnover calculations. ??? Following NSW, other States and Territories may feel compelled to amend their retail leasing legislation in response to the impacts of new technology and changing consumer purchasing behaviour.”

Ms Warwick said in response to these ongoing changes, landlords will need to consider how they structure their lease agreements. They may ultimately need to reach more sustainable and/or relevant rental structures in an effort to attract and secure new tenants and to ensure existing tenants remain viable at their centres.

“Other landlords will also likely be actively seeking to capture ‘click and collect’ purchases, and online purchases by households within a certain radius of a store, within turnover figures to structure rent and calculate turnover rent provisions,” Ms Warwick said.

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