A spotlight on concession agreements

General Papers and Articles

This note reviews some of the main operational and legal points arising in respect of the drafting of a store concession agreement ; it is prepared more from the point of view of the concessionaire – stores tend to have their own standard form documentation and individual approach.

Introduction

A store is not required to provide a written agreement but normally it will do so; if for no other reason than to protect its own interests. Generally, each department store operates on its own standard terms contained in its standard concession agreement. If one is not offered then it would be advisable to require one, whether it is in a letter form or in a more legal document.

Luxury brands and high end retailers find the concession agreement a useful way of testing the market, without the exposure to long term property costs, through having to take up a long term lease with upwards rent reviews or the use of capital to acquire freehold property. The brand/retailer will have various reasons for looking at a concession agreement, which will include the creation of an atmosphere of luxury and exclusivity in an retail environment where they will be surrounded by other high end brands; the ability to have more control over product pricing and increased profitability. The department store will be looking at specially trained staff as well as increased profitability – not having to provide so many staff or hold so much stock.

Contents

The main points usually covered by a standard concession agreement include:

• the length of the concession agreement (and the ability to extend the term of the agreement)
• (early) termination – when, in what circumstances and how much notice is needed – six months is a common period
• the concession space: location/prominence within the store and access as well as common services provided (such as staff canteen, rest areas, cloakrooms etc)
• services to be provided by the store
• responsibility for stock (and storage)
• advertising within the store (including any web site) and displays
• advertising outside the store – whether physically and on television and other media
• insurance
• indemnities
• staffing
• assignment – this is not normally possible
• commission payments
• sales requirements
• IP (and who owns and can use it)
• confidentiality

These terms will work alongside the store operator’s manual (which most stores will have in some form or other). This will supplement the terms of the concession agreement itself and go into (further) detail about:

• Opening times
• Stocking times and deliveries
• Shop fit
• Returns policy
• Credit card and voucher/gift card policy
• Staff matters – employment, appearance and removal
• Store security – ID cards etc
• Accounting matters – payment terms and processing
• Corporate graphics
• Marketing and promotions

It is important to make sure that the two documents do not conflict, and where they do, which one takes precedence.

Property Rights

A concession agreement normally contains all the costs normally associated with taking a lease (whilst not being a lease) – the property costs are built into the overall financial “package” with the rent liability under a lease becoming the commission fee paid to the store (and including the rate liability) in the concession agreement; other serve costs will normally be charged in addition – as noted below.

It is viewed normally as a contractual right to trade within a larger property but it is not a lease and the concessionaire does not acquire any statutory rights of security of tenure at the end of the concession agreement term, (assuming the concession agreement is correctly drafted by the store owner).

Stamp Duty Land Tax does not normally apply to a concession agreement and nor can it be registered at Land Registry.

It will be drafted normally so as to provide the store owner with control over the area to be used, its location within the store, with the ability for the store owner to reposition the concession within the store.

There will also be very tight controls over how the concession should be operated – so as to fit in with the trading style of the store as a whole.

Given the last point a trader should seek to ensure that:

• there is a minimum area that is licensed for its use;
• it is located within an area of the store and level within the store which suits its purpose
• possibly excludes location next to certain direct competitors and ensure that the general mix of other “outlets” is appropriate to the brand
• adequate and secure storage is available

Also consider:

• What services are being provided within the payment provisions: are cleaning, rubbish collection and security included?
• Are you going to be charged extra for the above and water, electricity and telephones?
• Is the web access sufficient?
• Are staff cloakrooms close to the concession area and are they available to your staff?

Services

Fit out

There are two likely approaches regarding fit-out:
• the store may make you, the concessionaire, responsible for the fit-out; or
• the store will fit-out the concession and require a contribution from you towards
its costs.

The store will want to pre-approve all images, designs and materials as well as the contractors engaged to fit-out the concession, and the method statement – covering how and when the works will be done.

Display

Normally, you will only be allowed to display a specific range of goods, with consent from the store owner for any material change – this is to ensure a varied spread within the store.

Some stores may want to have some control over pricing; luxury brands will want to prevent such control/influence.

Advertising

The store’s approval will be required where its name is included in the advertisement. You might be required to contribute to relevant advertising produced by the store with or without your approval – unless you are able to negotiate a modification.

Employees and Staffing

Concession agreements usually provide for the incoming concessionaire to staff the concession – and the employment contracts will be with the concessionaire who will be liable for statutory claims and claims made by the employee under the terms of their contract.

The store may well require that the employment contracts provide that the staff will comply with the policies, standards and procedures of the store. (The members of staff should be provided with copies of such policies and procedures.) The store may also require all of the concessionaire’s staff to attend its own training (including health and safety) programmes.

The store may play an active role in recruitment; it may specify the selection criteria and it may have the final say as to who is actually recruited. Concessionaires must be careful to avoid any discriminatory recruitment criteria or requirements imposed by the store.

Critically the store may require the right (in the concession agreement) to require termination of that person’s employment – or, at least, relocation out of the store. This can cause a conflict between the store and concessionaire on the one hand (in the terms of the concession agreement) and the concessionaire and the employee on the other (in the employment terms and employment law). It is vital that if such a provision is included in the concession agreement that the concessionaire add the provision that the store must provide detailed reasons for their request and provide reasonable assistance to the concessionaire in taking any action against its employees. Concessionaires would also be well advised to add reference to this possibility in the termination provisions of their employment contracts.

Primary liability for any form of discrimination will lie with the employer, although in certain circumstances the store could be liable to the employee. Although it is unlikely that a concessionaire’s employee would be considered an employee of the store, the store may insist upon an indemnity for the costs of any claims against it made by an employee of the concessionaire.

When considering an indemnity:

• Limit it wherever possible
• Seek to cap the liability – this may need to be linked in with the insurance cover the concessionaire will have to have in place (as an employer)
• Exclude specific claims made as a result of an unlawful act – e.g. discrimination
• Exclude legal defence costs
• Require the store to give you enough notice to enable you to go through any required fair dismissal procedures, to avoid a potential increased liability.

If the concession is assignable a change of the concessionaire may be a business transfer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 which might mean that the employees would be inherited by the new concessionaire on their existing terms of employment.

Commission, Restrictions and Obligations

Most concession agreements contain minimum sales requirements which you should attempt to negotiate with the store.

It is likely that the concessionaire will be under an obligation to use best endeavours to promote the sale of goods in the concession. Stores generally expect to have regular meetings with the concessionaire in order to analyse and review sales figures and performance.

Commission

The store will take a percentage of the retail sales value of all merchandise sold at the concession. The amount required under the concession agreement varies for every store, but a common figure is generally around 25% of net receipts (so the concessionaire would not pay twice for bad debt, assuming this was the way the agreement was drafted).

The definition of “net receipts” can be contentious; common areas of discussion turn around matters such as “click and collect” and web sales and how and to what extent those should be captured.

The store may also require payment of a service charge to cover such costs as stationary, packaging, telephones, postage and buildings insurance. The higher these additional charges the lower the percentage commission – or so the argument will go.

Restrictions

Some stores will provide that you cannot open or operate a concession or a shop within a certain distance from the store during the term of the agreement. Any such restriction would be subject to a test of reasonableness and there may be competition law implications.

VAT

The terms of the concession agreement will need to be analysed to assess how the VAT would work, which would normally be one of two ways:

• The store makes the supply to the buyer – the store is responsible for the VAT (the commission paid by the concessionaire attracting VAT) – and the concessionaire is effectively making wholesale supplies to the store; or
• The concessionaire makes the supply to the buyer and is responsible for the VAT (the commission it pays to the store attracting VAT)

HMRC’s VRS8150 note provides more information

By David Blomfield, Draper Lang LLP and Edward Bannister, Stepien Lake.
Draper Lang provides professional tailored employment law solutions for both employers and employees.

http://www.draperlang.co.uk

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