"Click and Collect" – A headache for turnover clauses?
Real Estate E-alert
The continued growth of multi-channel retailing is posing new challenges for traditionally drafted turnover clauses. Vanessa Laundon examines how “click and collect” could be the latest headache for landlords and what retailers can do to protect themselves.
Committing to a retail lease is a risk for both the landlord and tenant. The landlord needs to ensure that the rent is set at the right level so that it adequately benefits from the tenant’s trade, but also that the rent is set at a level at which the tenant can profitably operate. For the tenant, entering into a lease constitutes a large financial commitment for a fixed number of years and with no guarantee of trade and profit.
In recent years one way that landlords and tenants have sought to allocate risk in the landlord and tenant relationship is by way of a turnover rent lease. A turnover rent lease usually involves the tenant paying a base rent at a certain percentage of the open market value with a turnover “top up” which is paid in addition to the base rent where turnover exceeds the base rent. Turnover leases impose turnover reporting requirements on the tenant and in some cases, particularly in shopping centres, the landlord can require the tenant to link its tills (and therefore turnover information) direct to the landlord’s systems.
The continued growth of multi-channel retailing is posing challenges for traditionally drafted turnover clauses. Traditional clauses were drafted assuming that all sales upon which turnover is payable would be paid for in and completed in the store. As online shopping and in particular “click and collect” arrangements become increasingly popular with consumers the traditional model is being stretched. If the item is ordered and paid for outside of the store but then physically collected from the store can this truly be deemed to constitute turnover generated from the premises?
Needless to say Landlords will want to ensure that all proceeds of "click and collect" sales are included within sales for the purpose of calculating turnover so as to maximize rents. The challenge for Landlords is how to police online sales figures in the same way as in store sales. Tenants may be surprised to learn that sales completed online outside of the store can be included within their turnover figures where these products are collected from the store and are likely to have concerns about allowing the Landlord access to sensitive sales data not generated in store.
Given the wide basis upon which turnover clauses are usually drafted, the inclusion (or not) of online and "click and collect" sales for calculating turnover rent is an important issue which should be addressed when agreeing heads of terms. The only way for tenants to protect themselves is to specifically exclude revenue generated by online or "click and collect" sales from the turnover clauses otherwise these figures are likely to captured by the clause. Going forward, we expect to see even wider definitions of turnover being included in turnover clauses so that any "click and collect" sales are included and as online sales increases in popularity year on year this will become an even greater issue in the future.