The built retail environment in the UK is undergoing one of its most significant shifts in living memory. Even before the Covid-19 pandemic, traditional bricks and mortar retail was under pressure from changing consumer behaviour and the growth of online shopping. The pandemic expedited that trend but also created a landscape of hybrid working which has resulted in significant reductions in footfall in many of the UK’s city centres. The rise in online shopping, together with the collapse of some High Street staples has resulted in a reduction in demand for physical space and an increase in vacancies. These trends seems unlikely to be reversed in the short term and has caused landlords and investors to rethink the future of their current retail space. For retail occupiers, this rethink brings both challenges and opportunities.
Rise of mixed-use developments / destinations
We are seeing an increasing shift from pure retail developments to mixed use developments/destinations. In some cases entire retail centres are being redeveloped (St James Edinburgh as a prime example) into mixed retail/leisure/hotel and residential schemes and in others vacant retail space is being converted into alternative uses such as healthcare, leisure or even residential in order to expand on the offering to try and draw people in with wider experiences to try and win back market share from online shopping. While being part of a mixed-use scheme may increase footfall, and create synergies with other occupiers, the overall mix will be important and the suitability for individual retailers will differ.
Planning and lease use flexibility
Local authorities are under pressure to encourage regeneration of town centres and High Streets, whether through direct involvement or through the planning system. While England has introduced broader use class reforms in this area, Scotland has taken a more cautious approach, merging the old Class 1 (retail) and Class 2 (Financial, professional and other services) into a single use class in an attempt to allow wider use of space, and High Streets in particular, for alternative uses without the need to go through the planning system in an attempt to allow more flexibility and for owners and occupiers to be able to react to demand more quickly.
For occupiers it is important to consider permitted use clauses to ensure that these can accommodate potential changes in offering (e.g. a bath and beauty retailer evolving to provide spa services from retail unit) and the additional flexibility offered by the planning relaxation.
Lease terms in a changing market
Repurposing can disrupt existing lease arrangements and add additional considerations on new leases and renewals. For occupiers, it is important to consider:
Break clauses and redevelopment provisions – some landlords may be looking to add redevelopment break clauses on lettings/renewals to keep their options open for potential redevelopment (or where long term plans are already being worked up). Any landlord breaks may come more into play than they might have previously. With Scotland having no security of tenure it can be more difficult to resist any such clauses.
Alienation - occupiers should be cautious of wording that ties assignations to a specific type of retailer or use or allows the landlord to apply “tenant mix” type considerations as that may limit the tenant’s ability to dispose of their lease should they need to, particularly if the landlord is seeking to transition to a new format for their location.
Reserved rights – what rights is the landlord looking to have for works/redevelopment and are the protections on offer suitable to ensure that business is not affected.
Service charge implications – mixed-use schemes operate in a very different way to a traditional retail scheme. Trading hours for the various occupiers may be different, resulting in more staffing costs to deal with the longer operating hours. There is also the fact that the different occupiers may have significantly differing benefits from certain service charge items, particularly if there is a hotel and/or residential element in the development. It may therefore be necessary to have more complex and flexible service charge arrangements, which can result in less certainty for a tenant and potential for unwanted costs to be charged.
Key takeaways
Repurposing of retail space is going to be a continuing trend in the short to medium term and is clearly not just a landlord concern. It directly affects retailers in terms of footfall, lease terms, costs, flexibility, and long-term strategy. Repurposing can be an opportunity for retailers to reposition their brand/offering in a changing property market but they should keep a close eye on redevelopment plans, and ensure that their leases give them room to adapt but also protect them against disruption and unexpected costs. Proper advice is essential.
If you’re a retail occupier navigating the changing property landscape, please do get in touch with your usual Brodies contact, or any of the contacts noted below, if you would like to discuss the potential impact on your business and how to future proof your lease portfolio.
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