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Adapting Heads of Terms for Modern Retail: Re-imagining the High Street

This article explores the adaptation of heads of terms in the modern retail market and how planning can re-imagine the modern high street. It covers topics such as lease term lengths, rent payment and review, turnover rents, service charges, break clauses, and the impact of social media. The article also discusses recent changes to permitted development rights and the changing face of the high street.

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Adapting Heads of Terms for Modern Retail: Re-imagining the High Street

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  1. Adapting Heads of Terms for the modern retail market.How can Planning Re-Imagine the Modern High Street?

  2. Introduction • Caroline Smith – Partner Knights PLC

  3. Part 1 Adapting Heads of Terms for the modern retail market • Darren Smith – Knights plc and • Peter Leverett – SPACE - Retail Property Consultants.

  4. CVAs

  5. Lease Term • Term Lengths • Shorter • Flexibility for occupier vs Certainty for investors • A1 vs A3/A4/A5 use – cost of fit out • European model? 3 / 6 / 9 ? • Contracted Out? • London Estates (Cadogan / Howard de Walden / Shaftesbury / Crown Estate) • Shopping Centres • Break Clauses

  6. Rent Payment / Review • Payment terms – monthly / quarterly? • Review basis – open market vs RPI / CPI annual indexation • Crown Estate – Westgate Oxford (fixed 7 year term, no OMR) • Cadogan Estate – Kings Road (fixed 10 year term, RPI) • Code for Leasing Business Premises • Turnover Rents • Nil base rent – annual ratchet to 80%? • Performance related breaks? • Keep open provisions – liquidated damages? • Confidentiality – information sharing (Grosvenor Liverpool One) • Consensual Retail model? • Mike Ashley – the all inclusive deal? • New Builds

  7. Alienation • Assignment • Flexible or Restrictive conditions? • Landlord pre-emption • Group company assignments and sharing • Underletting • Ex 54 Act? Who has control? • Market rent vs Passing Rent – head lease conditions • Turnover rents • New Lease Code

  8. Alterations • Standard provisions remain • EPC / MEES requirements • Reinstatement provisions • New Lease Code

  9. Service Charge • How much? • Method of calculation? • What’s included? • Key points • Capped? • RPI • Exclusions • Competitive tendering • Sinking funds vs unusual expenses • Tenant association – representation on key costs • Established regime for recovery • Major impact on profitability

  10. Break • More frequent on all types of term lengths • 40% of all new leases but low incidence of exercise at 32% • 5 year term / 3 year break • Link to reviewed rent / ERV – uncertainty • Break conditions • Rent / VP / lease covenants / penalty • Case law • Lease Code • Landlord breaks

  11. Social Media • Digital age / Speed of change • Retail but not as we know it • Power of marketing channel • No bricks just clicks • Lease obligations • WiFi • Multi channel sales and turnover rents • Errant employees • Landlord’s as innovators – collaboration

  12. Exclusivity • Tenant mix decision • Rent reductions where no exclusivity • Turnover rent impact • Specific occupiers / zonal exclusions / time limited • New leases only – not retrospective

  13. Summing up • Commercial factors • A question of balance • A win for both parties – risk and reward • Collaborative not confrontational • Symbiotic Relationship • Constant need for innovation

  14. Questions Darren Smith Peter Leverett BSc MRICS MBA Partner Managing Director Knights plc SPACE - Retail Property Consultants DD: 0116 2421265 DD: 0345 900 3901 Mob: 07395 791115 Mob: 07860 967430 darren.smith@knightsplc.com peter.leverett@space-rpc.com www.knightsplc.com www.space-rpc.com

  15. Part 2 How can Planning Re-Imagine the Modern High Street? • Louise Thorne – Senior Associate Knights plc

  16. Where are we in 2019? • Recent Changes to Permitted Development Rights; • Imaginative Use of ‘A’ Use Classes; and • The Changing Face of the High Street – Case Study: Derby City Centre

  17. ONS & OS Great British High Street Survey • 6 June 2019 – Interactive Maps • 7,000 Unique ‘High Streets’ in GB • More Than Half (56%) of High Street Addresses are Now Residential • Approx a Third (31%) of High Street Addresses Used for Retail • 16% of People Live within 200m of a High Street • 2017: 404,145 Businesses Registered on High Street – 13% of all Businesses in GB • 2012-2017 – Retail Businesses on High Street Fell by 2% • 2012-2017 – Retail Businesses not on the High Street Grew by 6% • 2017 – Retail = 25% of High Street Employment

  18. Timeline for Change • October 2013 Government Launched Consultation – High Street Revival/Delivery of Homes • Key Pledge: Support the high street by increasing PDR’s • March 2019 WMS: PDR changes were confirmed • For the High Street, reforms would bring about: “Additional Flexibilities to Support Business…Capture Current & Future Retail Models” • Town and Country Planning (Permitted Development, Advertisement & Compensation Amendments) (England) Regulations 2019 • In force from May 25th 2019

  19. What are the new PDRs Which May Impact Retail? Part 3 Class JA – New Use Class • Change of Use from shops (A1), Financial and Professional Services (A2), Hot Food Take-Aways (A5) or from betting shop, pay day loan shop or launderette (Sui Generis) To Offices (B1a) • Floor space limit of 500m2 • Qualifying Date for Pre-Existing Use: 29 Oct 2018 • Prior Approval Application Required • Transport & Highway Impacts (Parking and Servicing), Noise Impacts etc. • Does an Adequate Provision of Services Remain? • Usual Exclusions Apply

  20. What are the new PDRs Which May Impact Retail? Part 3 Class M - Amended • Now allows change from Hot Food Take-Aways (A5) to Residential (C3) • How many in reality will we see? • Locality and Amenity Issues: Compatibility of Neighbouring Uses • Quality of Residential Environment Created

  21. What are the new PDRs Which May Impact Retail? Part 4 Class D – Temporary Uses • Previously Allowed C/U from: A1 (Shops) A2 (Professional & Financial Services) A3 (Restaurants/Cafes) A4 (Drinking Establishments) A5 (Hot Food Take-Aways) B1 (Business) • To A1, A2, A3 & B1 for 2 Years

  22. What are the new PDRs Which May Impact Retail? Part 4 Class D – Temporary Uses • Now Includes C/U From D1 (Non Residential Institutions e.g. health centres, day centres etc.) D2 (Assembly & Leisure e.g. Cinemas, Bingo Halls etc.) • To A1, A2, A3 & B1 for 3 Years • Exclusions: Up to 150m2 Office Space, Not LB’s/SAMs • The site has at any time in the past relied upon the permission granted by Class D

  23. What are the new PDRs Which May Impact Retail? Part 2 Class E - Amended • Electric Vehicle Charging Points • Commercial Premises – Increase in Height to 2.3m (from 1.6m) • Easier to Retrofit as Demand Increases • Remains: 1 Per Parking Space • Must be 2m from Highway • Excludes SAMs and Listed Buildings

  24. Possible Issues? • Needs to be a positive response to Economic Change but… • Does ‘one size fits all’ really work? • Do the changes respond to specific locational circumstances? • Offices replacing retail could exacerbate problems in some areas – eroding active frontages, reducing footfall etc. • Additional Residential Will Boost Some Town Centres But…..Conflict Between Compatibility of Uses • Do they changes go far enough? • Still no PDR for upward extension of buildings.

  25. A3 Uses in an A1 Unit? Use Class Definitions • A1 Retail includes for Sandwich Bars – Sales Taken Off the Premises • A3 Restaurants/Cafes – Sales for Consumption on the Premises • If Take-Away Sales are the Dominant Use, A1 Premises can be Acceptable • Use Must Not in Any Way Fall into A5 – Hot Food Takeaway • Primary Cooking Cannot Take Place on Site, But…… • Food Can be Prepared Off Site and Kept Warm/Heated Up on Site • Ancillary Seating is Permissible, But Must Be Ancillary

  26. A3 Uses in an A1 Unit? Benefits • Reduces Time • Reduces Costs • Lower Premium Paid to Landlord for A1 Premises than A3 • May Get Around Percentage/Proliferation Policies Possible Problems • May Need to Regularise Through Certificate of Lawful Use Application • LPA may Disagree & Request Retrospective Planning Application • May Need to Go to Appeal • Lack of Flexibility to Change Offer of the Premises • Don’t Forget the Need for Other Consents

  27. What is the Future Face of the Modern High Street? Case Study: Derby • The Effects of the Large Shopping Centre • The Change in the Traditional High Street

  28. Land Mark

  29. General Trends For Modern Living • Graduates & Young Professionals have Higher Expectations • Older Generation Looking to Downsize/Release Equity – Shortage of Smaller Units • Younger Generation More Mobile • Less Emphasis on Buying and Taking on a Mortgage • Greater Emphasis on Short and Long Term Rents • Main Employers can Attract but Need to Retain Graduate & Other Talent • Desire to ‘live, work and play’ within the one place • High Quality, City Centre Living = Desirable and Sustainable • Transformation of Derelict/Brownfield Sites

  30. The Emergence of the Build to Rent Market: The Landmark • High Quality Accommodation • Central Location – City Centre Living • On Site Concierges, Gyms Etc. • Communal Social Spaces • Close Proximity to Public Transport Hubs • Close to Employment Opportunities • Close to Bars, Restaurants & Shopping • A Fresh Population/Retail Market

  31. City Centre Regeneration: Becketwell Spring 2019

  32. City Centre Regeneration 2021

  33. What Does This Mean for Retail? • Stores at Ground Floor Level in PRS Schemes – Coffee Shops, Convenience etc. • Anchor and Independent Stores in Mixed Use Redevelopment • Critical Mass and Resurgent Customer Base • Bringing the Old ‘High Street’ Back to Life • Revival of Empty Units Vacant for Long Periods • City Centre Regeneration

  34. Questions? Louise Thorne Senior Associate – Planning DD: 01332 497613 Mob: 07834 254638 Louise.thorne@knightsplc.com www.knightsplc.com

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