Back to Basics: Charting a course through retail’s choppy waters

Peter Blakemore explores the options for landlords and tenants seeking more flexibility in the use of retail space. On 24 February, the Covid-19 lockdown measures in England were relaxed completely for the first time since the pandemic took hold in 2020. In the preceding summer of 2021, it was widely reported that one in seven shops was vacant on the high street and in shopping centres nationwide following the demise of a number of retail big hitters, such as Arcadia Group and Debenhams, and the economic turmoil created by the pandemic. Even prior to the pandemic, the retail sector had been undergoing a period of change as residential property returns to town centres and retail increasingly becomes merged with hospitality and leisure. With vacancies high and large voids in commercial centres, the retail sector is in a period of rebalance.  In one of its latest reports, Savills reported that 90% of leases will be less than five years in the near term, often with a break after three years. In many cases, institutional landlords such as Legal & General are rethinking their offering to tenants with the introduction of their commercial leasing framework for retail and leisure occupiers that is designed to “deliver optionality and be available to existing and future occupiers”.  What are some of the options available to landlords and tenants to allow for more flexibility in use of retail space (both in terms of use and length of occupation)? Here, I highlight some of the legal points to consider when answering that question. Planning use classes For properties in England only, the coming into force of the Town and Country Planning (Use Classes) (Amendment) (England) Regulations 2020 means that landlords can enjoy much greater flexibility around the kind of occupiers of properties that would traditionally fall under use class A1. The new use class E (commercial, business and service) encompasses the former class A1 (retail), class A2 (financial and professional services), A3 (restaurants/cafés) and B1 (offices), along with health/medical uses, creches, nurseries (all formerly D1 uses) and indoor sports/recreation (formerly D2 use). Subject to the conditions in any extant planning permission, permission is no longer required to change between any of the uses within the new class E. This will, in theory, allow much more flexibility for landlords of larger mixed-use shopping centres and allows for the move towards greater variation of tenant mix at greater pace. This could be useful for filling larger voids created by the departure from the market of retailers such as Debenhams, which occupied large floor areas and were often anchor tenants. However, in practice, careful consideration needs to be given to the fact that: An extant planning permission may be subject to conditions that directly or indirectly restrict the use of the property, or constrain how a property might operate, meaning that a change of use without discharging those conditions is rendered impractical. This is also true of any associated section 106 obligations. External alterations to the property may still require planning permission, dependent on whether the building works are permitted development.  There may be private property constraints, such as restrictive covenants or the terms of an existing lease with a narrow permitted user in an existing headlease, or thought will need to be given to the definition of the permitted use in the new lease/occupation agreement. Experiential retail Retail is now more of an experience. The move to online retail was supposed to signal the death knell of the high street, however, bricks-and-mortar retail is hitting back and experiential retail (though obviously stifled by the pandemic) can now begin to return to the forefront. Retailers are prepared to try something different and host other, smaller or complementary retailers within their space – for example, the recent collaboration between Primark and Greggs. Consideration should therefore be given in leases by tenants to allowing for more flexible provisions in respect of sharing spaces within the demise.  Whereas traditionally leases have focused on underletting and assignment, the ability to grant concessions of space without the need for landlords’ consent should be considered when negotiating a lease. Landlords can consider limiting the number and area of concessions in order to retain control over the property, but this will allow for more options for a tenant if a change to the use of the space may be required. Flexible lease terms Tenants may want more security than a licence or tenancy at will, and landlords may want to be able to change the tenant mix of their centre. There are a number of options to consider here in the drafting of leases, including but not limited to: Mutual rolling breaks: Depending on the length of notice, this may allow for the parties to have an element of flexibility while at the same time having a set contractual term in the event that the breaks are not exercised. This removes the uncertainty of landlords being reluctant to grant any licence beyond six months (thus a longer period of occupation) so as to avoid unwittingly granting a Landlord and Tenant Act 1954 protected tenancy, but also give some level of security in terms of potential use of the property. A clause that permits the landlord to have the option to relocate the tenant within the estate or centre, allowing the landlord to retain flexibility as to tenant mix. The tenant should look to have provisions in the lease to ensure that in the event that the alternative location is not agreeable, they are compensated for the cost of relocation, or can reject the move/negotiate the terms. The ability to reconfigure the property without the need for consent should be sought by the tenant. The landlord may wish to allow this but to be able to input into what constitutes an acceptable level of reconfiguration without consent. Tenants should also consider fascia signage changes to reflect possible concessions being added to their base offering. End of the term: Thought should be given to the repair obligations in the lease, especially where a shorter term is anticipated. This ties in with the shop fit and reconfiguration – tenants may seek to have more freestanding, easily reconfigurable shop fit outs but if they do not anticipate structural changes, should consider seeking to reduce the repair liability and end of term requirements to a realistic level. Temporary arrangements Traditionally, flexible occupation agreements have been drafted as either a licence or tenancy at will. The emergence of shorter-term, 1954 Act contracted-out leases with mutual breaks may in time replace these agreements. However, they remain a useful option, particularly in spaces where the landlord may want to fill a void with a seasonal or temporary offering (and avoid business rates liability as a minimum benefit) or where a tenant wishes to allow a concessionaire to occupy space within its store. A tenancy at will is only usually used where a tenant is going into early occupation or while a renewal lease is being agreed and it is not explored here. A licence is a personal, non-exclusive permission to occupy the licensor’s property (or part only of the licensor’s property) subject to the licensor’s and/or any other third parties’ rights of occupation. It is important for the licensor to ensure that they limit the hours that the licensee can occupy their property and that they make clear that the permission to occupy is non-exclusive. The licence fee may be daily, weekly or monthly and can also be turnover linked. Where a licence is granted for the whole of the unit, the licensor should ensure that they do not unwittingly grant exclusive occupation, particularly where the licensee has been in occupation. Licenses can be considered for short-term occupation agreements. These offer advantages to seasonal tenants who may not require year-round occupation, or for “pop-ups” that may be seeking to take advantage of short-term events that may be taking place in the vicinity of the unit or concept stores/new product launches. They also have the advantage of often being shorter, more succinct documents than leases. Points to keep in mind The above is a brief summary of some of the considerations that either party may want to make in order to achieve flexible use of their retail and (with the emergence of use class E in England), leisure spaces. There are, however, some important legal considerations to bear in mind, perhaps most usefully at heads of terms stage, when negotiating flexible space, in order to achieve the best outcome.  Peter Blakemore is a senior associate in the property team at Brabners Image by Malcolm West/Pixabay