Negotiating your Retail Lease in a Changing Retail Climate
There is a lot of anecdotal evidence out there to suggest that for some time the nature of retail is changing in Australia. It is quite clear that the tables have turned in terms of negotiating power of a retail tenant today as compared to when I first started in legal practice 20 years ago.
I often talk to my clients about the notion that when you sign up a lease, you are locked in for the long haul and so if the numbers do not stack up, you simply should not take the risk to lock yourself in. Once you sign on that dotted line, it’s not simply a matter of being able to walk away from your site – you are obliged to pay the rent for the term that you have locked into and you have invested many hundreds of thousands of dollars in your fit out. Therefore, I am taking time out to give you as prospective tenants some tips on how to negotiate your lease in a changing retail landscape.
The entertainment and leisure percent syndrome
I negotiate a lot of retail leases – more than half of those are based in shopping centres. The suburban shopping centre of today is recalibrating its focus on being a place for people to spend their time rather than their money on goods and products.
Therefore, the shopping centre of today is focussing on the sale of food and beverage, entertainment activities and high-end product that involves a retail shopping experience. Therefore, I often express my concerns to my prospective tenant clients who are negotiating leases that involve food and beverage if they are not offering something different – they will need to move a lot of food and beverage to cover their rent in an often spatial environment that is already flooded with competition.
Therefore, it is absolutely crucial to push hard on the right commercial deal. It is my experience that Landlords are less willing to walk away from a deal when push comes to shove in the current climate.
Getting the deal right
I am finding landlords are willing to offer generous incentives – usually in the form of fit out contributions, rent free periods or rental rebates through the life of the lease or a combination. However, you need to be careful and not be seduced by the numbers, the benefits of which may evaporate fairly quickly if you have not looked at the devil in the detail.
For example, there is no point in receiving a generous contribution to your fit out if you have not properly estimated the cost of your fit out so that you face cost overruns. A typical trap is the prospect of category 1 costs. These are typically costs associated with variations to essential services such as plumbing and drainages points, ventilation shafts, flooring, etc. It is very important to negotiate a capping on your contribution as a tenant to variations to such items so that your fit-out contribution and costs do not escalate.
Another example is lease and rent commencement. There are various combinations and formulae out there but what I tend to see in the retail space is a lease commencement based on a handover date and then a rent-free period that equates to a fit out period; or a lease and rent commencement that is based on the earlier of completion of fit out, commencement of trade, or expiry of fit out period. Therefore, if you are not careful in estimating how long it will take to complete your fit out, or timing of commencement of fit out following an agreed handover date, you may quickly eat into to your rent-free period.
You should also not be reluctant to push hard on your rental rate per square metre. You should also consider what is included in the rent calculation – is it a gross rent that covers a base rental amount and an outgoing amount or is it a nett rent and an additional payment for outgoings? You should really analyse the outgoings numbers, both current data, historical data, and estimates of the future to see how the outgoings have moved over time. If you are a retailer, you may also be required to pay turnover rent and a marketing levy and so these contributions should also be subject to negotiation. Turnover rent looks at a contribution based on a percentage of turnover once rent exceeds a certain figure. You may be able to negotiate a capping of rent based on the lesser of a prescribed percentage of turnover versus a combined amount of rent, and outgoings.
You should also look closely at what other contributions are required from you including, tenancy design review fees, and hoarding fees. Again, you should not be reluctant in negotiating these amounts downwards.
The bottom line of all of the above is that you really should look closely at the detail of a deal.
The way forward
There are many more issues I could discuss with you in relation to making sure your leverage of the benefits of a changing retail leasing climate. However, you need to be careful in your negotiations and not rush your decisions. If you need assistance in your negotiations of your retail lease, please don’t hesitate to get in touch with Coleman Greig’s Commercial Property team.