Challenges for retailers and landlords as leases expire and shopping habits change

Out-Law Analysis | 22 Jan 2014 | 12:30 pm | 6 min. read

FOCUS: The UK high street is an area of intense policy focus and this will continue in 2014, but retailers and landlords are also having to grapple with challenging issues relating to changing shopping habits and big box stores.

Making sure that negotiations on deals keeps pace with consumer behaviour and retailers' responses to the growth of online shopping will be a challenge in the year ahead.

Large number of leases due to expire shortly

Almost 80% of high street leases are due to expire in the next five years, prompting concerns that retailers may choose to close down unprofitable stores or reject landlord proposals for re-gears this year as more shoppers go online.

Jones Lang Lasalle's head of retail research, James Brown, said that the number of leases due to expire before 2020 reflected the 1980s trend to let shops on 25 year leases combined with the 1990s trend to let shops on 15 year leases.

Where retailers have a number of leases due to expire, location, flexible short terms, the ability to use certain stores to enhance their online arrangements and landlords that are willing to look beyond standard institutional terms will be among the factors influencing the decision to retain shops. High street retailers may increasingly look to out of town locations or regional retail centres with better transport links, free parking and flexibility of use.

The high street

There is an improving outlook for the high street and 2014 may be the year when some of the empty units are finally occupied, but there is no doubt that the high street has changed forever.

Different regions are experiencing very different challenges. Demand in London will remain high, while other areas of resilience outside London, described by Jones Lang Lasalle in its recent property predictions report as "pockets of gold", include Oxford, Bath, Brighton, Colchester, Winchester and Edinburgh. But there will be closures in other areas.

Measures to help reinvigorate the high street

In order to support the retention by retailers and landlords of premises in the high street, the Government has signalled its intention to provide a wide package of measures via the planning system to make it easier for flexible use of premises on the high street. These include greater flexibility for the change of use of redundant retail buildings to residential, banks and building societies and education uses and this is due to come into effect in April 2014.

The Government is also consulting on liberalising planning restrictions on mezzanine floors in retail premises by creating a national planning permission to allow their installation where this will support town centres. Retailers and landlords should both take advantage of the changes once they are available.

We will continue to see pop up stores making use of temporary vacant space, allowing some online retailers to test the market using traditional stores. Shoreditch has pioneered the first pop-mall with Box Park, open for a period of four years and including pop-up fashion stores, galleries, cafes and restaurants.

Changes to planning legislation in 2013 have facilitated pop up stores in smaller premises, those with gross internal floor space of up to 150 square metres, by allowing certain retail stores, cafes, takeaways and others to change temporarily to another use within planning use classes A1, A2, A3 and B1 without obtaining planning consent for a single period up to two years. For larger premises, those between 150 and 500 sq m, the owner will need to obtain prior approval from the local authority to adopt a flexible use.

The retail property real estate investment trust (REIT) Hammerson has announced a trial of interactive pop up windows in temporarily vacant space in some of its shopping centres. The pop-up windows have been designed to activate shops by using touch screens, twitter walls, holographic windows or virtual assistants - turning short term vacant stores into an interactive shopping experience. The aim of the pop up windows is to combine traditional shopping habits with online shopping.

Landlords will need to be flexible with tenants on the terms of their lease and be able to make decisions quickly to embrace the pop up philosophy, including developing new forms of tenancy arrangements to deal with pop up windows. Adopting a nimble and agile approach, particularly when it comes to the form of lease to be granted, will be key to getting the benefit of the short term occupation.

The package of business rates reliefs and discounts announced in the Chancellor's Autumn Statement in 2013 will give traditional retailers a much needed boost this year although it was disappointing that the Chancellor missed the opportunity for an in-depth review of the rates system.

The measures include £1,000 off the rates bill for businesses occupying premises with a rateable value up to £50,000; the introduction of reoccupation relief in relation to vacant premises; the extension of Small Business Rate Relief to 2015 (it was due to expire in April 2014) and the cap, but unfortunately not freeze, of 2% on the 2014 rates increase. Businesses will also be given the opportunity to pay their rates in 12 monthly instalments rather than 10 instalments.

Changing shopping habits

The relentless growth of e-commerce will continue and bricks and mortar stores will increasingly act as a showcase to enable online shoppers to view products before they purchase them and also to function as click and collect locations.

Consumers want the products that they have ordered online fast, so retailers need to find ways to meet this demand by finding a diverse range of click and collect venues. This could be in partner stores, in pubs, Post Offices or at tube stations.There will be an increase in convenience stores and warehouse locations that are able to service click and collect orders.

This may lead to complex planning use class considerations where a property with, say, planning permission for a warehouse use could be used for the collection of goods by customers. Retail stores and warehouses will increasingly have a more multi-faceted role within society as the market looks to maximise and diversify the range of uses that it can provide. It is therefore questionable whether all buildings used in the retail sector will be either fit for purpose or have planning permission for the uses authorised within their consent. It may also require landlords to be more flexible on delivery hours and vehicle restrictions at new and existing stores.

There are also predictions that online retailers, such as Amazon, will follow the example of and open 'showrooms' for their products with face to face customer service. In properties with turnover rent leases there are issues regarding how or whether to include in the turnover rent online sales which are collected from the store or which are delivered directly to a customer but arise as a result of a showroom store. There is currently no consistency of approach by landlords as to how this is dealt with and tenants are obviously reluctant to include any online figures which will increase their rental.

The pace of change in online grocery retail is accelerating and it will be an important avenue for growth for the supermarkets. More internet distribution centres, known as dotcom warehousing, will be required to meet demand for online grocery shoppers.

Again, location will be vital, as the use of online food shopping is not consistent across the country, or across demographic groups. Retailers find themselves needing to open the new dotcom stores because delivering to thousands of homes requires a completely different set up to transporting big loads to a few hundred conventional stores. We will see demand for smaller urban warehouses able to fulfil orders swiftly as well as large central hubs. Major supermarkets will this year commit to doubling the space devoted to dotcom stores, according to Jones Lang LaSalle.

The increase in demand for deliveries to be made from dotcom stores will involve retailers working closely with their logistics services providers to ensure supply depots are located close by and can meet the demand and overcome the challenges of making more deliveries within cities and urban areas. Analysts have suggested that city planners should provide economic incentives for sustainable freight deliveries though high speed rail links and invest in infrastructure, such as freight villages, to ensure sustainable urban logistics. Other policy changes such as improving access for delivery vehicles and lifting night driving bans may also be required.

Re-inventing big box stores

This change in retail consumer behaviour leaves those retailers with big box out of town stores with the problem of what do with the excess space that they now have. We are already seeing a move from big box stores to destination stores - mixing leisure, retail and community uses, as outlined in a recent Pinsent Masons white paper (8-page / 2MB PDF). For example Tesco's Watford store is now a cafe, a clothes shop, a restaurant and a community centre. Morrisons and Tesco were among the retailers who declared an end to the 'race for space' last year after admitting that out-size stores had been caught out by the emergence of online shopping and smaller convenience stores, so this change of approach is required for existing big box stores where the retailer cannot divest itself of the property.

It is not yet clear whether shoppers will flock back to physical stores, but we can be fairly certain that the retail landscape will never be the same. Most commentators believe that retail is rapidly evolving and the new economics and customer expectations and habits make it unrealistic to expect a return to the conventional approach to expansion solely via the growth of the bricks and mortar portfolio.

Tom Johnson and Andrea McIlroy-Rose are retail and property experts at Pinsent Masons, the law firm behind