Place makers

The decline of traditional high streets, whose retail offerings once placed them at the heart of community life, has been the focus of discussion and handwringing for decades.

In 2011, shopping guru Mary Portas published her ‘independent review into the future of our high streets’, which was commissioned by David Cameron and Nick Clegg, then prime minister and deputy prime minister. It was a defining moment. Portas noted that ‘our high streets have reached a crisis point’, and that ‘unless urgent action is taken much of Britain will lose, irretrievably, something that is fundamental to our society’.

While the review addressed the existential threat to town centres of the growth in online retailing, other events have since had an equal if not greater impact.

The Covid lockdowns turned retail centres into ghost towns, with only essential shops, in particular supermarkets and other grocery retailers, allowed to remain open.

The pandemic led to an even greater reliance on online retail than before. According to ONS figures published in 2022, online sales accounted for 26.6% of all retail sales, up from 19.7% in 2020.

The cost of living crisis, and rising rents and business rates, delivered the coup de grace to well-known names. When House of Fraser and Debenhams closed their doors, they left in their wake huge and empty retail units in malls and town centres across the country – dead space that cast a pall over other activities.

It has taken around four years for some confidence to return to the retail sector, with place-making playing a central role in shaping our towns and cities. The public realm, including retail, is no longer just about creating shopping spaces, but locations for communities to engage and connect.

'We’re seeing huge empty units, which are now being converted to other uses like trampoline parks, mini golf, high-end cinemas, bars and restaurants as well as some retail'

Richard Hughes, Moore Barlow

Some deserted shopping malls have been transformed into destinations, with vast retail stores replaced by leisure and hospitality facilities, as well as independent businesses and pop-ups.

This has led to a change in the work of property lawyers. Moore Barlow partner Richard Hughes explains: ‘With the collapse of some of the big retailers, which were the linchpins of the high street… we’re seeing huge empty units, which are now being converted to other uses like trampoline parks, mini golf, high-end cinemas, bars and restaurants as well as some retail.’

With the move to destination shopping, landlords are demanding that more flexibility is built into leases, property lawyers note. Hughes adds: ‘In the past, the shopping centre might just have been retail and cafes, but now, in order to draw in customers, landlords are looking to make more use of their space. So, for example, they might have live music events, or, for example, around the Olympics, we saw more pop-ups.’

The landlord/tenant relationship is generally heavily negotiated at the lease-drafting stage, with each side’s lawyers trying to get the best possible deal. However, as the retail sector recovers from the pandemic, lawyers note an increasing willingness by both sides to work more collaboratively.

One example is turnover rents, which generally involve a tenant paying a base rent, plus a percentage which is tied to the income they generate. ‘There has been some talk about whether turnover rents are the way forward,’ notes Helena Davies, partner and head of the retail team at Brabners.

It means, Davies notes, that everyone is pulling in the same direction: ‘It does work quite well in shopping centres, as both sides are working together. If you are a shopping centre owner, you want your tenants to make the most money possible, and it’s in your interest to have excellent services, and to think about the design of a mall, with a view to improving the revenue of all the individual occupants.’

One really needs to understand how the client’s business works, she adds: ‘A really good example is the way that online shops and click-and-collect work alongside the physical shop, and what the client is expecting in terms of documentation.

‘Many fashion retailers are using their bricks and mortar shops as a showroom. They’re not necessarily expecting people to come and buy on the day. They come in, try and touch, and feel and smell – but then they’ll go home, and they’ll buy online. If you’re a landlord and you’ve got a turnover lease, you need to make sure that you are capturing that element; the people that came in, and then bought from home online. But how do you do that?’

Kate New, head of property disputes at Foot Anstey, observes that some tenants have been trying to get all the rent classed as turnover rent. She believes this is a ‘Covid hangover’.

‘There was this trend,’ she says, ‘of tenants saying: “If I am not able to open my shop, and I’m not going to have any footfall, with no turnover, I am going to drill my rent right down so it’s very low and I’ll make it all turnover rent. Because if I find myself in a scenario where we are back in a pandemic and the shopping centre closes, or my unit closes, I am not going to have to pay any rent”.’

So far this is not an argument that has succeeded, New notes, but adds: ‘It’s interesting to see it creep in.’

Carol Phillips, a commercial property partner at Foot Anstey, says that the focus in her practice is to make sure that the landlord and tenant relationship is positive, and that both sides understand each other’s operational needs. ‘We try and bring that into the mix, rather than it being a “landlord-friendly” or a “tenant-friendly” lease. So, we keep an eye on how a tenant is going to operate from a site and maximise revenue and profitability from it, and interact with it in a way that doesn’t require them to go back to the landlord every 10 minutes for consent.’

Flexibility in leases has become a common feature, she adds. ‘Tenants want to trade in a way that means that they can seamlessly trade across all platforms from one store. Whether that’s click-and-collect or deliveries. They need to maximise what is going out of one retail shop. So, some of that will come into the leases in terms of the rights they’re seeking from landlords. That operational flexibility is something we are seeing a lot more of.’

Phillips continues: ‘A question that comes up a lot is: how do we get tenants to contribute to marketing budgets and be part of that dynamic, in terms of trying to drive footfall? How do we energise tenants to contribute to that? I am not sure there’s an easy answer, because traditionally tenants have taken the view that footfall is something for the landlord to sort out. It’s a discussion that’s ongoing.’

She concludes: ‘We are seeing that tenants want greater flexibility, with landlords accepting that the flexibility can be achieved in a way that’s mutually acceptable.’

Green leases

Real estate has one of the biggest carbon footprints globally of any sector, and landlords as well as tenants are coming under increasing pressure to improve their green credentials to meet their own as well as the industry’s environmental targets.

One of the tools used to improve the sustainability of a building is a green lease, whereby obligations are placed on both landlords and tenants to ensure that a building is operated sustainably. While there is no set definition of a green lease, energy efficiency has become a key feature following the introduction of the Minimum Energy Efficiency Standards Regulations 2016 (MEES Regulations).

The regulations currently require a building to have an Energy Performance Certificate with a minimum rating of E. However, in practice, landlords as well as tenants are pushing for ever-higher ratings.

This is partly because of market demand for more sustainable buildings, but also uncertainty over whether the minimum rating will be increased. In 2021 the last government put forward a consultation aimed at raising the rating to C in 2027, and B in 2030. This proposal was subsequently followed by a significant U-turn in 2023 by prime minister Rishi Sunak, who announced a ‘more pragmatic, proportionate and realistic approach’ to net zero. The government scrapped the requirement of a C rating for residential landlords, but no mention was made of commercial properties.

'We have landlords who are very keen to try and drive in a direction that enables them to invest in sustainability'

Carol Phillips, Foot Anstey

Labour has promised a major overhaul of MEES, with a focus on improving the energy efficiency of private rented homes by 2030. However, the position on commercial properties remains unclear.

Phillips says: ‘We have landlords who are very keen to try and drive in a direction that enables them to invest in sustainability. We also have some really big tenant clients who have their own agendas and plans about what they’re doing as corporates across the [sustainability] piece, but they don’t want to be hamstrung by hundreds of different landlords telling them what they need to do and end up with a patchwork of obligations.’ As a result, she says: ‘We end up facilitating a discussion between both parties in order to find a middle ground.’

She would like ‘to have a better indication from government as to what they are doing in this space, because at the moment, we are drafting to protect clients from an unknown landscape, and that’s not very helpful. The hypotheticals are being bounced back and forth.

‘You have a slightly bizarre situation where if a tenant takes quite a tired unit on a high street, which has an EPC [rating] E, and then does loads of work to fit it out and make it a B… technically, at the end of the term, the landlord could ask them to take it back down again to an E, which seems a nonsense.’

As a result, Phillips explains: ‘With individual tenants what we try and do as we are renewing leases is to drive a new normal… we are having a lot of conversations all the time and trying to educate landlords that it’s in their interests to be flexible and more amenable than their standard contracting position.’

However, she reflects: ‘There’s definitely been a hardening in the market in the last year… with landlords defaulting to: we just want to be able to tell you what we want at the end [of the lease]. We don’t want to be flexible at this point, because we don’t know what the future looks like.’

Ramatu Banga, a partner at Fieldfisher, points out that cost can be a factor in green lease negotiation and the uncertainty surrounding future EPC ratings. The greater focus on sustainable practices by both parties to a lease has led to more reporting and data gathering around energy performance, she says.

‘Ultimately, it all comes to cost,’ Banga says, ‘because the tenant is going to have to gather information to provide to the landlord around what they are doing and the impact of their business on the environment, which can detract from their fundamental purpose, which is to sell goods. There will no doubt be further regulation, but we just don’t know what it is. So, you’ve got landlords trying to futureproof their leases.

‘As lawyers, we like to be specific in leases. Everything is measurable, and a cost can be attached to it, whereas now we’ve got to future-proof leases, so there’s an unknown cost going forward. So, when you’re negotiating a lease, landlords are trying to pass that cost on to tenants.’ That includes the cost of raising a property’s EPC rating.

‘We’ve seen the worst of things’

Lawyers note that there has been slightly more optimism in the market over the last few months, with shoppers returning to bricks and mortar retail outlets, partly due to a drop in interest rates, and partly the confidence retailers are drawing from a change of government. Labour has promised to reform business rates to ‘level the playing field between the high street and online giants’.

According to ONS figures, retail sales volumes rose by 1% in August 2024 and a further 0.3% in September – outperforming forecasts. George Constant at Spector Constant & Williams perhaps best sums up current sentiment: ‘With interest rates coming down, people will have more money to spend on shopping. I think we’ve seen the worst of things when it comes to retail.’

'There is a massive appetite out there among people and organisations to get their hands dirty and fight for their high street'

Mary Portas

There is also a sense in which local and regional government realise an alternative is needed to the assumed ‘death’ of town centres. The degeneration of these spaces as retail outlets have retreated from them has negative consequences that go much further than the impact on landlords. What is lost is a sense of community, crime can go up and future investment is deterred.

The response of a city like Bradford has been to redesign its centre to play to its potential strengths – a £1bn redevelopment that will likely see the demolition of its dilapidated shopping centre.

Speaking for the success of such efforts is Portas’s experience, related in her 2011 review: ‘The more people I have seen and spoken to, the more I realise that there is a massive appetite out there among people and organisations to get their hands dirty and fight for their high streets.’

 

Maria Shahid is a freelance journalist