One of the many consequences of the COVID-19 pandemic is the rapid acceleration to online retail. As more consumers opt for online shopping from the comfort of their homes over visiting the High Street, a notable consideration for both landlords and tenants is the increasing presence of turnover rents (particularly in light of the recent New Look CVA – for further information see here), and the treatment of “click and collect” in retail leases.
A turnover rent lease usually involves the tenant paying a base rent often at a certain percentage of the open market value of the leased premises, with a turnover “top up” which is paid in addition to the base rent (being an agreed percentage of the tenant’s turnover from the relevant premises). Traditionally drafted turnover clauses assumed that all sales upon which turnover is payable would be paid for and completed in store, and so calculating the income generated at the store was a relatively straightforward process. This traditional model is being stretched beyond recognition as online shopping and “click and collect” continue to grow.
A key question emerges – should the definition of “gross turnover” in the lease include or exclude turnover generated from “click and collect” sales? Moreover, how can landlords police online sale figures in the same way as in-store sales? There is increasing disagreement between landlords and tenants in tackling these questions. Landlords will, of course, want to ensure that all proceeds of "click and collect" sales are included for the purpose of calculating turnover to maximise rents. Tenants on the other hand will be keen to exclude “click and collect” sales so far as possible, and are likely to have concerns about allowing the landlord access to sensitive sales data not directly generated in the leased premises.
By way of example, if a customer orders a new jumper and opts to collect from his favourite brand’s Oxford Street store, the question can hinge on how that store fulfils the sale – does it use stock from the stock room of the Oxford Street store, or does it fulfil the sale using stock from its Glasgow warehouse/other storage location which has been shipped to the Oxford Street store ready for collection? In either case, landlords will argue that the turnover generated from the sale should count towards the turnover rent for that store. On the other hand, tenants will argue that if the sale is fulfilled using stock from the warehouse/other location, the store is simply used a point of collection only and its stock remains intact - therefore the sale should not count towards the calculation of turnover. These issues should certainly be addressed at an early stage when agreeing heads of terms.
Understanding how retail tenants fulfil “click and collect” orders (and other internet sales), including how that data is subsequently collected and passed to landlords, is essential in the negotiation of any lease based on turnover rents. In an increasingly digital economy, this is likely to remain a divisive issue in an already challenging sector.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2020