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Are you paying your Landlord percentage rent on your online sales?

In Commercial Real Estate, Retail Leasing by LibertyLeasing

In 2020, online retail sales grew by 44.3% according to Australia Post. Consequently, this means that Landlords are recouping more in percentage rent. Naturally, the increase is partly a result of the pandemic and multiple lock-downs across Australia. However, it is also reflective of consumers preference to shop online and the pandemic simply accelerated the transition into the e-commerce universe. This view is supported by the fact that both Queensland and Western Australia grew both in the quantity of sales and overall national share of online sales, even though both States suffered through minimal lockdowns comparatively.

The vast majority of retailers with a bricks & mortar store front also have an e-commerce platform that enables customers to shop online. Though many retailers have only made that pivot to e-commerce as a repercussion of the global pandemic. We’ve seen this result in several issues for retailers in respect of their lease and the percentage rent calculations.

What is Percentage Rent?

Percentage Rent / Turnover Rent (used interchangeably) is a percentage of a retailers gross sales that is paid to the Landlord under the lease. When and how that percentage rent becomes payable depends on the lease drafting. However, generally speaking, if there was an online sale and the stock for that sale was filled from the physical store, then it would be included in a retailers percentage rent calculations.

If you aren’t familiar with how these provisions operate, then we’ve got another article that explains it in further detail.

Seems fair. What’s the problem?

The dramatic increase in online sales has been a pain point for many retailers as it has ultimately increased their rent. This is in conjunction with many retailer’s overheads increasing due to upscaling (or creating) its e-commerce infrastructure.

Traditionally, retailers will spend time considering the cost and benefits of their e-commerce supply chain – and that includes factoring in the cost of percentage rent vs additional off-site locations for the purpose of online order fulfilment. Because many retailers were forced into upscaling their e-commerce platforms they haven’t had the opportunity to conduct these analysis. They’ve also not had an opportunity to properly build-in the increased expenses into their gross occupancy cost calculations.

How do you fix it?

It is critical that retailers review their lease to determine what the percentage rent clause says regarding internet sales. Then that lease needs to be reviewed in conjunction with the retailers e-commerce operations to determine if there is a nexus between those online sales and the physical store, and amended as appropriate.

It is important to note that the rent relief regulations introduced by the various States and Territories do not capture percentage rent. However, those sales will usually be included when calculating whether a retailer qualifies for rent relief and JobKeeper under the relevant regulations. This has resulted in some retailers not receiving the level of rent relief that they need to continue building a successful business and requires more complex negotiations with the Landlord.

Get in touch

If you’re not sure about whether you need to pay percentage rent on your online sales, or if you need to negotiate a new percentage rent arrangement with the Landlord, you can get in touch with us here and we will arrange a complimentary strategy session with one of our Tenant Reps.

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