Is the demise of the long-term retail lease a new opportunity for commercial landlords?

The COVID-19 pandemic has significantly changed the retail landscape, and ecommerce is at an all-time high. In 2020 we saw the downfall of big high-street names such as Debenhams and the Arcadia Group, and commercial landlords are facing the effects of the closure, which, from these companies alone, will be an anticipated 200 high-street stores in the UK. It has been reported that this will leave nearly 15 million square feet in total of vacant retail space.

Jonathan Millar, Managing Director of Colliers Belfast, believes that COVID-19 has been the “final negative contribution to create the perfect storm in the retail market, bringing into sharp focus the previously ignored requirement for all stakeholders in the sector to bring forward fundamental structural changes.”

Compound this with statistics published in a 2021 report (Retail Economics and NatWest) detailing that, since the start of the COVID-19 pandemic:

• 46 per cent of UK consumers have completed a new online purchase that they previously only ever purchased in-store; and
• 32 per cent of consumers believe their shopping habits would change on a permanent basis (an even higher 40 per cent amongst 45–54-year-olds),

and one can’t help but question, especially if you are a commercial landlord, not only the future of the face of the high street but also the covenant strength, stability and reliability afforded by some retail tenants.

What are the options open to a commercial landlord looking to re-let its now vacant retail space?

Commercial landlords can seek to re-let their vacant property to another retail business in what is currently a difficult economic environment. However, as Jonathan Millar suggests, participants in the retail sector must recognise that the landlord and tenant relationship has become a partnership, defined by arriving at a sustainable financial position, in many cases delivered via turnover rents but certainly in the form of shorter lease terms of between 3 and 5 years.

Alternatively, landlords could see this as an opportunity to diversify its offering, providing, for example, an experience that can’t be replicated (and potentially bested) by an online behemoth and which all but demands superior footfall / interest in a post-pandemic, experience-deprived society.

What does this “diversity” look like and what alternatives does a landlord have?

Diversification, as the term suggests, comes in many forms, with options available from splitting vacant retail space and letting to a number of distinct retail tenants, leasing the space to businesses in the leisure and hospitality industry, transforming (where possible and appropriate) vacant space for residential purposes and everything in between.

Agents have, in particular, long since been endorsing the benefit of the leisure and hospitality markets and their advantage not only as an alternative letting but also to generate and augment existing interest and increase occupancy levels in existing retail schemes. The offer of new, exciting experiences is certainly an attractive proposition to consumers (especially in the current and post- Covid terrain) and it’s common knowledge that increased interest brings with it higher footfall, benefitting not only the novel leisure tenant but also the familiar faces of its existing, retail counterparts.

Could this be a “win-win” for commercial landlords?

At Keystone Law, we believe in tailoring our approach around our clients’ wishes / requirements rather than seeking a “one size fits all” solution. With the right advice, there’s a myriad of options available to businesses currently or those soon to be standing at such a crossroads. If you are a commercial landlord and would like to discuss the issues and options raised in this article, please contact us.