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Much ink has been spilled, including by us, during the past few weeks over the short-term measures introduced to protect tenants following the outbreak of COVID-19. However, of growing interest to both landlords and tenants is how COVID-19 will affect institutional lease terms in the long run. Within the retail sector alone, 79 per cent of surveyed landlords predict that the pandemic will bring about permanent changes[1]. In the coming weeks we plan to look at this more closely but one of the first areas which seems ripe for change is the treatment of rents.

It was already clear from the now extended RPI consultation that changes to rents are on the horizon, but the current climate has brought those changes into even sharper focus. Unsurprisingly, the market has already seen many landlords and tenants negotiating various forms of temporary, more flexible rental arrangements, such as rent deferrals, rent holidays and rent reductions – to accommodate the cash flow issues many businesses are facing as a result of COVID-19.

The need to strike a balance between a landlord maintaining a secure revenue and a tenant meeting its rental liabilities while protecting its business will continue to pose a challenge and may give rise to far more complex rental terms in the future. In particular, as many businesses, especially those in the retail sector, face the prospect of lower revenues long after the lockdown restrictions are lifted, and global pandemics are expected to continue to pose a real threat in the future, far greater consideration is being given as to how rents should be valued.

More tenants are consequently expected to seek turnover-based rents, that reflect the variable performance of their businesses from time to time. Turnover rents are not a new concept, but they are notoriously complex. Whether landlords will be receptive to variable rents, when the market has traditionally valued a certain income stream, is currently hard to gauge. It is possible that it will largely depend on the extent to which tenants are willing to share their data and whether the sector can develop a mechanism which accurately reflects turnover by reference to both online and offline sales, and the interrelationship between these different channels - something it has struggled to achieve to date.

As a result, it remains to be seen whether the sector will see significant movement here in the near future. It is nevertheless highly likely that both landlords and tenants will need to be open to new ways of thinking, as the sector continues to evolve in response to the challenges that lie ahead.   

[1] Retail Gazette blog 12 May 2020 

If you require further information about anything covered in this briefing, please contact Barbara Webb, Helen Auden, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, June 2020

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