Landlords are constantly challenged by the need to try to maintain footfall in their schemes; one key component of this is combining the retail offer with a leisure one, so that schemes are seen as a day out destination as well as a necessary visit to buy essentials such as food and domestic appliances. In addition, there are a number of green initiatives a landlord may wish to see introduced into its scheme, both to demonstrate its positive credentials as a landlord and, like all of us, to tackle the increasing cost of overheads such as power. Tenants often have the same challenges.
The result of this is the need for landlords and tenants to look closely at the retail parks which they own or occupy, and at the legal paperwork in place which governs them - whether at a legal title level or within the landlord/tenant lease contract itself. They must do this in order to assess the flexibility which they have to modernise and change or, looked at another way, the risk of dispute if either pushes ahead with changes which suit some, but not all.
So what are the sort of things that need to be considered?
Building new units on the common parts
As well as a practical assessment of the impact on existing tenants, a landlord also needs to review the existing lease contracts themselves. Some tenants may already have minimum parking numbers which would be breached by a new building going up in the car park, or have no build zones to protect the visibility of their unit from the main road. Some tenants may also not be enamoured if the proposal looks to introduce a competitor into the scheme.
This sensitivity was highlighted in the recent case at the Gyle in Edinburgh where the landlord's right to reclaim and build on common parts was challenged by Marks and Spencer, one of the anchor tenants. Unusually, in this case the interest in question was a property interest in common parts, as opposed to the more usual situation where a landlord grants a shared right of use only. Despite this, after three court actions, the court came down in favour of the right for the landlord to effect further development, and sanctioned changes to the letting to permit a new Primark to be erected in the car park. After a number of court hearings the question in the latest action was whether Marks and Spencer were acting reasonably in withholding consent to the changes required and the court favoured, in this case, the argument of the landlord.
Introducing green initiatives - such as solar panels on roofs and geothermal pipes into the common parts
Landlords and tenants, in their different ways, are being challenged on their green policies and by the increasing cost of utilities, particularly electricity. Solar panels are increasingly common on roofs, with issues to be addressed such as how this feeds back into the service charge and what is to happen with the Feed in Tariff ("FIT") payment.
For some landlords and tenants the initial investment may be off-putting, particularly for tenants where FIT payments may be lost in a relatively short time, dependent on the unexpired lease term. With effect, however, from the summer of 2019 landlords and tenants will be entitled to move panels to different buildings and the FIT payments with them. This will be a big plus potentially to tenants, but may also open much more debate over ownership of the panels themselves once installed and the FIT payments.
One to watch as well in Scotland is the introduction of the new Climate change requirements, which bring with them a need to improve the energy efficiency of certain older buildings - although we don't think of retail parks as falling into this category, it is quite possible some might. Improvement may therefore be forced upon older parks.
Changing the tenant mix and profile
We all know that shopping patterns are changing. This can result in variations in the traditional service vehicle access and egress arrangements - access and egress might be required at more frequent times of the day, by smaller delivery vehicles tasked with delivering "on line" purchases. In addition, many shoppers prefer to buy on line and opt to collect their goods after hours. At one time retailers were keen to have permissions to have trolley bays in the car park; now they need to build in scope to place click and collect pods and are revisiting their lease contracts to check whether they have the entitlement to do this.
Landlord are keen to make their parks more attractive by creating a mixture of leisure and retail uses; so as well as addressing planning consent requirements, landlords are now looking to bring in a mixture of food offers. In the past it was quite common to see in retail parks and shopping centres solus (i.e. exclusivity) protections offered to tenants - to the effect that, at least for a period, the landlord would shield them from competition through undertakings not to let to competitors. So, in lots of retail parks and shopping centres, sensitive uses such as coffee shops and restaurants, as well as key anchor tenants, were protected by solus provisions. Whilst there may have been commercial logic to such arrangements (based on the fact that as a new occupier, a tenant had to invest substantially in setting up and fitting out its business), these arrangements perhaps at times overstepped the mark resulting in a lack of competition and customer choice. The introduction of anti competition controls did not end those arrangements, but has introduced the requirement for a full assessment of the rationale for the exclusivity and the surrounding circumstances and indeed surrounding area before determining whether to grant a solus right is indeed justifiable, with hefty penalties in the event that the rules are breached.
This has allowed more competition in some areas, such as food offers. Combined with a more mixed retail and leisure offer, these changes are helping to keep units filled and shoppers interested in visiting retail parks rather than simply ordering their shopping on line.
Change is critical for future sustainability; shoppers are more fickle than ever and competition is rife. The key is to plan ahead and to manage risk.
The landlord/tenant relationship should be a partnership, but at times there will inevitably be a degree of friction between their respective interests. Cases such as Marks and Spencer's challenge at the Gyle will, every so often, end up in the courts for resolution. This is no bad thing as, after all, that is what the commercial courts are for and it helps to shape boundaries in the future. In most cases however it should be possible to revitalise and redesign retail parks for the future in a way which avoids too many conflicting interests.
We are here to assist with this process; our role is not simply to buy and sell stock, but to work with you through its life cycle to help to add value and manage risk. Hopefully this article, by giving a few thoughts on the more common changes topical at the moment, will provide you with a little more awareness of when and why to bring forward change in a managed and considered way.