In the fast moving world of retail, concessions are a popular way for businesses to expand quickly the scope of its operations into areas which are often already lucrative by using the existing goodwill of another brand and without the commitment, hassle and cost of acquiring and maintaining standalone premises.
For the main retailer, granting a concession can utilise surplus space, diversify a store’s offering, increase both footfall and dwell time while also providing additional income.
With such potential for mutual benefit, it is perhaps unsurprising that retailers are teaming up with a variety of other businesses to create concessions. There are however many pitfalls for both the retailer and the concessionaire which, if not avoided, can have serious repercussions.
As a retailer, even if you do not currently grant concessions (or immediately plan to), when taking a new lease the potential for concessions should always be addressed to accommodate any future shift in strategy without the need for going back to the landlord for consent and incurring additional legal fees and delay.
When granting a concession, there is a danger that the relationship may be interpreted as one of landlord and tenant (as opposed to that of retailer and concessionaire) regardless of what the actual document is titled or described as. It can be very difficult to be certain of the type of relationship created and this will largely depend on factors such as the length of the term and whether the concessionaire has exclusive possession (which will usually come down to the permanence of the space occupied by the concessionaire within the property).
To avoid any issues associated with not being able to get the concession space back (including the potential for the retailer being in breach of its own lease) it is therefore usually safer, and a matter of good practice, to ensure that the concessionaire does not have a statutory right to renew the arrangement.
When granting or taking a concession, it is important to consider the following issues: –
- Is the granting of concessions prohibited in the retailer’s lease (or subject to certain restrictions such as floor area)?
- Permitted Use – will the user provisions need expanding to cover the use of the proposed concession? For instance a shop may have to expand its use if it wants to include a restaurant concession.
- Alterations – will any fit-out work need the landlord’s permission and a licence for alterations?
- Planning – are any additional planning consents required?
It is common for the rent to be based on the sales performance of the concessionaire by way of turnover rent.
Turnover rent will be based on a percentage of the concessionaire’s turnover and the wording of any such mechanism needs careful attention especially in respect of the determination of turnover (such as what is deemed turnover and how this is proved), the calculation of the turnover rent (for example is there to be a sliding scale) and payment terms.
It is also important to consider (especially where a proposed concessionaire is relatively unknown) whether some kind of fall-back provision is required if the concessionaire does not perform as expected. This can be achieved by a guaranteed minimum rent or by including flexible termination provisions.
Overall, provided that concession arrangements are implemented properly and the issues are dealt with accordingly, they can often prove fruitful opportunities for both parties.
Julie White of BHW Solicitors acts for one of the UK’s largest retailers and is well accustomed to the demands and challenges of implementing a wide range of different concession arrangements. Julie can be contacted on 0116 281 6228 or by email at julie@bhwsolicitors.com.