Retail turnover clauses in an online world

Purpose of this paper: Traditionally, lessors and lessees of especially national tenants use a risk-sharing retail rental model, which consists of a fixed rental and a risk sharing component, the so-called turnover clause. In an online retail environment, however, revenue is generated through several channels and it is not possible to assign to each store a portion of the total revenue by simply looking at individual instore turnover. The opportunity of selling online provides disincentives to tenants to generate instore revenues, thereby increasing the risk of turnover-based contracts becoming ineffective. This article investigates whether the commonly used risk-sharing clause in retail rental agreements used in South Africa is still the most relevant in this changing environment. Four alternative rental constructs: (i) fixed rental only, (ii) turnover rental only (iii) geofenced rental and (iv) alternative performance metrics are investigated. Methodology: Role players in the South African retail real estate are interviewed and questions formulated based on the results of the literature review are discussed on a one-on-one basis. The interviews are analysed and solutions to accommodate the disruptive effects of online retailing on the calculation of turnover rentals are tested against industry knowledge of the participants. Findings: The preliminary finding is that the existing model will continue to be the preferred model for the foreseeable future because of the underlying adversarial relationship between retail lessors and lessees and the existing model’s ability to share risk while guaranteeing a minimum fixed rental.