The introduction of the Government’s three tier COVID-19 system and the second national lockdown is seeing an emerging trend of retailers negotiating ‘pandemic clauses’ into leases.
As reported by The Sunday Times, major retailers like Amazon, which is looking to open a chain of high street stores, as well as Sports Direct and Schuh, are all seeking to insert these clauses into new leases. They would be activated in the eventuality of a Government-mandated lockdown, to help retailers survive an enforced closure.
The exact structure of pandemic clauses would vary according to the agreement between a landlord and retail tenant but could see rents reduced by half during the period a store is unable to trade.
Looking beyond new leases and lockdowns
Whilst the focus of these pandemic clauses is on new lease negotiations, they should also be considered by retailers already committed to rental agreements. Similarly, they don’t have to be limited to addressing the impacts of lockdowns imposed by Government. They could also offer some form of protection to retailers and landlords experiencing suppressed high street trading because of COVID-19, including as a result of imposed restrictions on trading hours or the type of goods which can be sold.
The significant number of people working from home and not commuting into cities has seen a significant decline in valuable lunch time and after-work shopping in city centres. This has been made worse by stuttering weekend trade, with shoppers shunning the high street amid concerns about coronavirus infection rates. The British Retail Consortium and ShopperTrak reported in September that high street footfall was 33% lower than the same period in 2019.
Landlords understand these challenging trading conditions and it is exactly why retailers, irrelevant of the status of their lease agreements and the lockdown tier they are in, should approach the possibility of a pandemic clause. In doing so, tenants should be aware that a clause which activates a rent reduction is a voluntary concession by their landlord, who may be under pressure from their own lender or fund to whom it is accountable, and that landlords aren’t immune to the costs of the pandemic.
Leases for retailers and landlords
To benefit both the tenant and landlord, the structuring of a pandemic lease clause could entitle the landlord to recoup rental losses when store sales return and revenue increases or share in the rises and falls by linking rent to turnover generated. It would essentially see retailers appreciate a reduction in rent when they’re facing low or no sales by deferring part-payments to a later date or only paying a rent proportionate to their turnover.
For this to be effective, retailers and landlords should take a short-term rolling view of trading circumstances. This would see company accounts and turnover reviewed on a regular basis, with adjustments made to rentals in response to trading conditions. Setting a benchmark for trading performance and clearly defining financials at the outset is key to this. It means there’s absolute clarity on all sides about what triggers a rise and fall in rent. Referring to previous full-year accounts from a pre-COVID era could also help to define parameters for changing leases.
There are different options open to retailers and landlords, and pandemic clauses are being increasingly viewed as an amenable solution for both parties in fairly addressing the effects of COVID-19, both at the start of and during an existing landlord/tenant relationship. Landlords see the value of supporting retailers to avoid both the prospect of empty units and tenant insolvencies, which may leave them with no income and even losses.
If pandemic lease clauses are to benefit all parties, they need to be robust and clearly defined. This will help avoid any ambiguity and potential wrangles as trading conditions change and rents are adjusted.
Helen Marsh, Commercial Property Partner, Forbes Solicitors.