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What is this week's blog about?
In this week’s blog, we take a look at a flexible leasing case study at Kingland, Poole. This is essential reading for any candidates pursuing the (commercial property) Leasing & Letting competency. It will also be interesting reading for any candidates involved in redevelopment or regeneration schemes and investment or asset management.
What is Kingland?
Kingland is a refurbished retail scheme in Poole, UK. It forms part of wider redevelopment proposals for Poole Town Centre by Legal & General Investment Management (LGIM) Real Assets. The overall plans include redevelopment of the Dolphin Shopping Centre, a renewed public realm, a local makers market for 15 traders and an annual calendar of over 500 community events.
The regeneration plans aim to tackle the declining quality of Poole’s town centre retail offer. This will be through reframing and repositioning the retail offer, in line with LGIM’s wider retail strategy to deliver ‘future-ready places’ and positive local social and economic impacts.
Wider benefits of the redevelopment include increased local footfall, innovation and investment. This will support the future redevelopment plans for the neighbouring Dolphin Shopping Centre by LGIM and support a growing trend for consumers to shop locally.
What do LGIM say about the scheme?
Denz Ibrahim, Head of Retail and Futuring at LGIM Real Assets, stated: ‘Kingland is a physical manifestation of what can happen when you offer deliberately ambitious, bold, creative, standout brands – who are doing something a bit different – a platform to launch their ideas and share their stories. It will deliver a market-leading environment jam-packed with hand-picked brands, programmed events and content all sourced locally. It’s a great example of our role as an editor of space, shaping environments to ensure we have the right content, at the right time, in the right places’ (EGi, 2021).
LGIM are looking at rolling out similar schemes to Kingland across the UK to kick start regeneration in other declining retail locations. Each scheme will be tailored to the specific local market and community, avoiding a ‘cookie cutter’ approach and limited longevity.
What does the scheme include?
The scheme has been refurbished to currently include 10 new units, operated by entrepreneurs and start-up businesses.
These include HUX Custom Surfboards and Café, Greenslade Fishmonger, Grounded Coffee, ånd Fragrance (run by ex-Lush head buyer), Pen Gallery, Paintshop Studio, Ten Foot Naked, Wild Roots, Restored Retro and Viper Gin.
What terms have been agreed?
All 10 units have been let rent free and rates free for 2 years. This aims to encourage a creative community to become established, following the announcement that non-essential retailers can re-open for business.
This is based on LGIM’s flexible partnerships (leasing) model, with an initial focus on turnover rent options. This represents a move away from traditional long institutional leases to a flexible model that can be adapted to a range of tenants, including start-ups and established multi-national retailers.
The aim is to increase investor returns, whilst also working collaboratively with retailers to provide flexibility and increase local consumer engagement. This should help to rebalance risk and reward between the parties to a lease.
LGIM categorise their leasing structure into four core categories;
Flexi – 3-36 month leases of white box spaces on turnover only rents. This is aimed at start-ups and seasonal businesses.
Operational – 3-5 year leases on turnover deals, with more flexibility than traditional leases, e.g. performance-linked break options. This is aimed at more established operators who are happy to share risk and reward with the landlord.
Flagship – leases over 5 years for established operators who prefer traditional leasing terms and longer-term commitments.
Flexi Flagship – flexible leases over 5 years, which will appeal to leisure operators in particular, who have high initial fit out costs and require longer lead times to engage with consumers.
What issues might be encountered with flexible leasing?
How are repair liabilities allocated between the parties where lease lengths are short? This includes dilapidation liabilities and reinstatement obligations where a property has been fitted out by a tenant.
How are service charges apportioned and managed for short leases?
How are turnover deals structured? E.g. What is included in turnover if a % of sales are online or click and collect, how is information shared between the parties and when is turnover rent paid?
How will tenant mix be maintained to encourage high footfall and collaborative retailing?
How can the landlord ensure sufficient security is held given the lack of covenant strength for start-up retailers?
How do flexible leases and start-up covenants impact upon the investment value of a scheme?
Is it better for a scheme to be open for trade via flexible leases (and potentially at nil rents) rather than remaining vacant?
What happens if a retailer decides to close before the expiry of the initial lease term? What conditions apply to any break options agreed between the parties?
Can a retailer afford or accept the risk of fitting out premises if the lease length is only short?
How do tenants deal with risk of a landlord exercising a break option and their business continuity being affected?
What happens if a landlord seeks a higher rent at expiry for a contracted out lease, as tenants will not have the comfort of the renewal being dealt with within the provisions of security of tenure under the Landlord & Tenant Act 1954?
In all cases, leases will need to comply with the RICS Professional Statement Code for Leasing Business Premises 1st Edition. The only exception is where they are for leases under 6 months.
Surveyors need to be aware of the risks and rewards of flexible leases and be able to incorporate this into their reasoned advice (at level 3) to clients. This may mean advising a tenant of the benefits of a short, flexible lease or of the implications of not having security of tenure.
On the other hand, landlord clients will need to be advised on the impact of a short, flexible lease on investment value and of how turnover deals should be structured to balance risk between the parties.
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Stay tuned for our next blog post to help build a better you.
N.b. Nothing in this article constitutes legal, professional or financial advice.