Finding the flagship

Finding a physical store location allows retailers to build on their online brand image and reinforce their customer loyalty. However, the nuances of the UK retail real estate market mean that retailers will need support to navigate the choices of available locations and associated obligations of taking onerous leases.

For retailers looking to lay down roots in the UK – where should they start and what other considerations around UK incorporation, compliance and tax must be taken into account?

"Despite the e-commerce success, the store is the ultimate place where brand and customer converge; a commercial arena where product, perceptions, emotions, and customer satisfaction are being played." [1]

Following our earlier article “Clicks to bricks” where we discussed the trend for online stores moving to a physical presence, we are now looking at the next steps a business would take to secure a flagship premises. 

Whether you are an online only retailer or are an established brand with stores overseas and are now looking for your first UK property, you will face the same question - where do you start?

The retail real estate market is highly competitive within the UK with the obvious challenges of knowing where to set up store and then onto more nuanced complexities around the details of the lease. We have reached out to Ed Fowler, commercial real estate lawyer and head of the retail and leisure sector at law firm Cripps, to discuss some of the key trends and hurdles present in the market.

We started with the pivotal question - “Where is best to set up shop in the UK?”

“The location of that first UK store is key and a specialist retail agent will be best placed to advise and support on this. Most international brands will want to take their first store in London.

The retailer should consider their target market and the changing circumstances of the consumer. For example, with more people working from home, locations outside central London are becoming more popular for instance Chelsea, Hampstead, Kensington and Shoreditch.

Other popular cities for retailers to expand into include Bristol, Bath, Brighton, Leeds, Manchester and Edinburgh.”

The perfect location may be desirable to many brands. So when the ideal store has been found, how would a retailer begin securing the lease and obtaining the best terms?

“Agents will help you sell your brand to the landlord and negotiate the terms for the lease. The most popular locations and stores are in high demand and often a number of retailers will compete for the same store so you will need a brand presentation to sell your concept.

The next step is to agree heads of terms. These are a breakdown of key terms agreed such as the term, the rent, the permitted use and any specific conditions such as break clauses or turnover reporting. Heads of terms are not legally binding but they will be difficult to change with landlords when agreed so it is important that all are fully understood.”

It is worth noting that UK leases are somewhat unique. They include many more onerous obligations that are less common in other countries. We asked Ed to outline the common terms to expect in the UK.

All leases are unique and therefore it is essential to understand the heads of terms when negotiating your contracts.  Some common terms are:

  • Term (length of lease) – 10 years is common often with a tenant break at 5 years but landlords are considering more flexible, shorter arrangements.
  • Rent – most leases will contain a fixed yearly rent with a rent review if longer than 5 years. Some locations in particular shopping centres will charge a turnover rent in addition based on a % of your gross turnover which is often around 10%. Some leases are turnover rent only with no fixed rent.

"International retailers are sometimes surprised by the obligations which are imposed within UK leases. A key difference with UK leases is the full repairing obligation which places all responsibility on the tenant to repair the unit. In reality, this means that a tenant can be obliged to improve the state of repair of the store and this be an expensive commitment of tens or even hundreds of thousands of pounds. It is therefore very important that you get a survey of the store to reveal the extent of this liability at an early stage."

Location, location, location – but what other considerations are essential for a successful move?

Take specialist advice

Real estate and legal experts will help you navigate location choice and deal negotiation, agreement of terms and legal protection. Retailers should also be seeking advice on the efficiencies of different business structures, incorporation of new entities, tax on movement of goods and compliance with UK requirements.

Incorporating the entity

Landlords will usually require the lease to be in the name of a UK company and so retailers may need to incorporate their entity into the UK. There are also compliance issues to be met around company secretarial, statutory accounts and corporation tax requirements.

Ongoing compliance

This should include integrating the retailers' point of sale, stock management system and accounting software. There are different options for management reporting – either on your group accounting software or you can set up a UK ledger which is compliant with HMRC making tax digital (MTD) requirements.

Indirect tax

Importing goods into the UK is a critical step to ensure your store is stocked and ready for launch if goods are sourced or manufactured overseas. Any business importing goods into or exporting goods from the UK will require an EORI (Economic Operator Registration Identification) number.  Registration is required with HMRC and can be made alongside a VAT registration. Our team can advise and help with both of these registration matters.

Capital allowances

The costs of fitting a store are likely to be significant. Generally, no corporation tax relief is available against depreciation booked in the income statement. Instead, these capital costs of enhancing the space can be offset against your income within your tax return under a framework called capital allowances. A number of these allowances are currently enhanced allowing up to 100% tax relief in the first year of acquisition so it is important to review your costs and understand the most efficient claims to be made.

The key to putting down roots

Opening a new flagship store in the UK can be a  game-changing move for retailers. However, the right approach and consideration of the complexities inherent in the process – some of which are outlined above - will be the key to making that step effectively - and with confidence.

[1] Elle Education - Why having a flagship store can help your brand positioning and reputation

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