Retail rents are now increasingly being set on the basis of a base rent plus a percentage of the retailer's turnover, writes JACK FAGAN

TWO WEEKS ago the international discount retailer TK Maxx opened its 11th Irish store at the Kyle Centre in Portlaoise alongside the owner of the complex, Dunnes Stores.

It was no different from any other opening except that the fashion multiple agreed a new form of rental deal with the landlord. Instead of the customary fixed rent, the trader is to pay a base rent plus a percentage of the turnover – an arrangement that is increasingly being sought here by most leading overseas traders.

TK Maxx would normally have been expected to pay an upfront rent of between €400,000 and €450,000 a year for the two-storey Portlaoise building of 2,255sq m (24,272sq ft). Instead it negotiated an alternative rental arrangement involving a base rent of €250,000, as well as 5 per cent of the turnover.

The fashion retailer’s new policy of including a turnover element in the rental arrangement is being widely followed by other overseas traders who believe that it puts pressure on developers to ensure the continuing success of their shopping centres and high street stores.

In other instances, the yield from the turnover element can vary from 5–20 per cent depending on the overall takings and the profit margin. Shops selling electrical goods can have a high turnover but a small profit margin while fashion stores, with relatively inexpensive clothes, can have margins of up to 300 per cent.

George Ross of Jones Lang LaSalle, who handled the letting of the Portlaoise shop to TK Maxx, said that in this case the owners of the Kyle Centre (Dunnes Stores) should do even better under the turnover clause because the complex – and TK Maxx – were trading particularly well.

This new alternative rental arrangement has been successfully operated at Dublin Airport for many years. More recently it was introduced to food courts in large scale shopping centres.

The same rental formula has been brought to a fine art by Value Retail, the owners of the Kildare Village discount shopping complex in Co Kildare, which is bucking the trend with a double-digit growth in retail sales this year.

The village has 51 designer outlets which pay either a base rent of €570 per sq m (€53 per sq ft) or 12.5 per cent of turnover, whichever is the highest.

Unlike other shopping areas, the traders do not have a right to renew their leases and, if their operation is not doing well, the management will either downsize them or move them out altogether.

The principle of a base rent plus a percentage of the turnover was agreed with Zara when it opened its first Dublin store on Henry Street in 2003. The arrangement is understood to have yielded a higher return for the landlords because of the runaway success of Zara in its first few years of trading in Dublin. That arrangement allowed the landlords to revert to the old-style rent review every five years but, had they chosen to do so, the tenant was automatically entitled to a break clause in the lease.

Developer Joe O’Reilly also negotiated a top-up element to rents when he leased stores to Zara and H&M before selling on the Gaiety Centre on Dublin’s South King Street to Anglo Irish Bank.

In this case the top-up element is unlikely to have worked because of the fall off in consumer spending as a result of the recession.

Other overseas traders settling for a base rent plus a percentage of turnover at some of their outlets in the Republic include River Island, Gap, GameStop, Currys and Costa Coffee.

Ross says that while this arrangement gives tenants room to breathe before having to pay rent, the practice is less appealing to developers because, without a guaranteed rent roll, they may find it difficult to secure banking finance. “From the tenant’s point of view, it means that they are sharing the risk with the landlord; if the centre does not trade well the guaranteed rent will be lower but, if the centre does well, everybody will benefit.”

He said that while the system had operated in food courts for some time, it was only when the market softened that landlords began to accept the new arrangement in order to fill vacant stores.

David Potter of Savills estimates that more than half of all significant new lettings are based on a basic rent as well as a proportion of the turnover. Most landlords preferred the security of a fixed rental income, he said, but at the moment they were quite happy to do business with the alternative arrangement as long as they attracted the right tenant.