Is co-retailing the answer to the high street’s woes?

Over recent years we have embraced a sharing economy – sharing office space, residential accommodation and eating places – but now we have to implement social-distancing measures and consider if some of these sharing trends should be put on hold for health reasons. This sits in stark contrast to the post-pandemic economy, which has created a real need for the fiscal benefits that sharing space can provide. This is particularly so in the retail sector, which was already struggling pre-pandemic. Retailers need to look at ways to cut costs and co-retailing (safely implemented, of course) could well be the solution. What is co-retailing? Co-retailing involves sharing shop space with other retailers: essentially a shop within a shop. It is not a new concept – brands have been co-retailing in department stores for decades. However, we now see a new spin on this concept, with many retailers announcing space-sharing “tie-ups”. Costa and Waterstones, Asda and Greggs, Next and Paperchase, and Sainsbury’s and Argos are some of the household names that have implemented space-sharing initiatives together. But what are the options for retailers looking to share premises in this way? Concession agreements A concession agreement allows a concession partner to use space within a store for the purposes of the concessionaire’s specified business. It is a hybrid of a licence to occupy and a commercial agreement. The concession agreement will make it clear that the concession partner will not be granted a tenancy or exclusive possession of the space, but a licence. The size and location of the space is agreed in advance, but the host has the discretion to relocate the concessionaire and to access the area at all times. This is essential as it (a) ensures the arrangement is truly a licence and (b) gives the host the flexibility to reorganise their store. From a concessionaire’s perspective, they will not want to move from the agreed location and forgo the fit-out costs. To counteract this, the agreement may state the new location must be agreed as suitable, with the host paying a contribution towards relocation costs. The host may want to maintain the appearance of a single shop by implementing restrictions on the shop fit-out and prohibiting signage on the shopfront. The space will usually be handed over in a “white box” condition which incorporates identical flooring/lighting as the rest of the store. This can be problematic for a concessionaire with a strong brand identity. Generally, the concession partner will be expected to keep its part of the store tidy and repair its own fixtures/fittings, but otherwise the repair of the overall shop remains with the host. The supply of services and associated costs are usually dealt with via a service charge. The services will include heating, lighting, rates, waste removal, maintenance, telephone lines, staff facilities, security and cleaning and can be charged as a fixed price or a percentage of the concessionaire’s net receipts, depending on how the principal fee is calculated. The host will have to maintain property and public liability insurance for the store, but the concessionaire will remain responsible for insuring stock and fixtures/fittings. The concession agreement will deal with hours of operation. The host will need to keep the store open during specified operating hours and the concessionaire must commit to the same hours. If the concessionaire wants to trade outside of hours (eg for a promotional event) that will need to be agreed. Concession agreements are not assignable. A licence to occupy is a personal, contractual relationship and does not create an interest in property which can be transferred but, in any event, the host will want to control who operates in its premises and ensure the uses remain complementary. Concession agreements are usually terminable on short notice if the arrangement is not working out. As the agreement grants a licence, the concessionaire will have no security of tenure. For concessionaires this will be a concern if they have invested in a fit-out, stock and staffing and this can be partly alleviated by the host agreeing to repay the costs on a yearly depreciating basis if the agreement is terminated. The agreement will also be terminable in the event of a change of control, reputational issues or insolvency (although the impact of section 233B of the Corporate Insolvency and Governance Act 2020 may mean the termination right is temporarily unenforceable). Where a host is seeking to reap benefits from the concession brand’s appeal, a concession agreement may also contain a minimum sales requirement. The fee payable under the concession agreement can either be a fixed licence fee or a percentage of the concessionaire’s net receipts, subject to a minimum concession rate, in much the same way a turnover lease operates. In those circumstances, you can expect to see a prohibition on the concessionaire having another concession or store within a certain radius, subject to competition law restrictions. Other (non-property) issues which will be covered off: Stock – who owns it, ensuring adequate levels and how it is paid for by customers; Staffing – who employs, providing appropriate levels, skills and uniforms; Intellectual property – use of logos and names in advertising; Health and safety – including complying with Covid-19-related guidance; and GDPR compliance – who controls the customer data. Overall, a concession model gives the host significant control over the business being conducted in their premises, which is important for retailers seeking to protect their brand. Retailers that want to have concessions must ensure they are provided for in their initial lease. Alienation provisions will often be restrictive and an express carve-out needs to be negotiated. The landlord may wish to insert safeguards restricting the areas of the shop that can be occupied by concessions and/or specify that the shopfront must not be included, the appearance of a single shop is retained and no landlord and tenant relationship is created. Underletting part Alternatively, retailers requiring less control may wish to underlet part of the premises for a rent. The advantage for an undertenant is that they will be granted proprietary rights. However, there are restrictions that need to be considered (the final three in the list also being relevant considerations for concessions): Many leases prohibit underlettings of part. If underlettings of part are permitted, leases often state they must be self-contained and separate areas. This allows side-by-side retailing in adjoining spaces, but not co-retailing within the same space. Tenants usually need to make applications to their landlord for consent to underlet. The cost and delay of applications may be prohibitive, especially for underlettings which are short term and/or for small areas. Underleases may need to be on the same, or consistent, terms as the lease meaning there is no scope to negotiate the form of underlease. Many leases contain restrictions on the rent that must be paid by an undertenant, often not less than passing rent or open market rent. Rent reviews may need to be at the same time and on the same terms as the lease – not ideal if they are due imminently. An underlease must expire before the end of the lease it is granted out of (otherwise it’s an assignment). A co-retailer may want to commit for a longer period than the host’s lease term to make the set-up worthwhile. For leases granted prior to 31 August 2020, the authorised use is likely to be Class A1 of the Use Classes Order. Retailers trying to make use of co-synergies (eg coffee shops in bookshops) may find this restriction prohibits the proposed complementary use. It remains to be seen whether the wider Class E, introduced on 1 September, will filter down to leases and therefore create greater freedom for mixed uses. Underleases often have to be contracted out of the Landlord and Tenant Act 1954, so the undertenant will not benefit from security of tenure. Think carefully Retailers wishing to share space should first consider if the terms of their existing lease permit it and secondly which is the best option for them to pursue. This will ultimately be dependent on individual circumstances, including the configuration of the property, the desire to co-retail or side-by-side retail and the importance of protecting their own brand. The benefits of co-retailing Offloading space – Retailers no longer need as much space, but downsizing is a costly process. By sharing existing space, the host negates expensive relocation costs and generates a new income. Sharing costs – Some retailers can’t afford standalone shops in the face of high rents, service charges, business rates, maintenance and staffing costs. For hosts, sharing overheads can make all the difference. For co-retailers, it presents the opportunity for physical stores but without hefty acquisition and running costs. Synergies – Retailers can utilise natural synergies to improve footfall, increase dwell time and extend customer bases. Partnerships, such as coffee shops in bookshops, create the much sought-after in-store experience. Physical presence – E-tailers often bridge the gap between online and physical presence with “pop-up” locations. Co-retailing is another “halfway house”, which achieves the same outcomes but on a more permanent basis. Jennifer Ayris is a senior associate at Irwin Mitchell