New Look warns landlords of pre-pack deal if it cannot renegotiate turnover-based rents
Source: Mintel 30-06-2020

UK 30-06-2020

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New Look is considering a pre-pack administration if it cannot persuade its landlords to accept turnover-based rent across its 500-strong store estate. The fashion retailer stressed it was “the last thing it wants” and remains committed to seeking a consensual agreement with landlords.

New Look is among a number of retailers that also include Frasers Group that is seeking turnover-based rental agreements amid the COVID-19 pandemic.

Mintel comment:

“The debate regarding turnover-based rents is nothing new, but it has built up a head of steam due to COVID-19 and the pressures being placed on physical trading. The value of retail property has been in a state of flux over the recent period – the increasing penetration of online has seen store footfall and volumes fall and as such on a store-by-store basis rates which were logical ten years ago simply do not make financial sense in the current climate.
Landlords have obviously fought against this rapid devaluation, aiming to ease the devaluation into their estates in an effort to ensure they do not prematurely drop rates too far and in the hope of finding an equilibrium as the market reacts and settles from the seismic shifts online has brought.

However COVID-19 has only accelerated this shift to online and further damaged store-footfall and that is why some such as New Look are pushing for a store-by-store turnover based rental structure to ensure their survival. From the retail side such an agreement is logical, stores pay what they can based on their location and their footfall allowing rents to ebb and flow based on market tides.

From a landlords perspective you can also see why some are fighting hard against this. Turnover-based rents artificially split online and store-based operations, when the two are intrinsically linked. We know online sales see a boost in a local area when stores are open, but as more of the store’s function moves away from being transactional, and this moves to online, there would be concern from landlords that they do not profit from this shift. From a free-market perspective there would also be concerns that such a shift would remove competitiveness and/or leave landlords lumbered with tenants with low store-based turnover.

The crux of the turnover-based rent debate is trust in the direction of a business, and that is something at present New Look is struggling to establish. This is its second major restructuring in less than two years, and from a landlord's perspective if the concession is given here and the business still fails this sets a dangerous precedent for other tenants. However with all sectors under pressure, there are few suitors in the market willing to take on commercial space. In the short term this puts the power in the hands of the retailers – and we will see more businesses look to take advantage of this slight shift in power in the coming months.”