Retail Lease Negotiation: A Beginner’s Guide
Retail lease negotiation is rarely an enjoyable process. Even the sentence is boring. Unfortunately for retailers, it is an uncomfortable but necessary part of every business. If you don’t get it right, it can have a huge snowball effect on your business.
Here at Leasewise, we have over 20 years of retail leasing experience and are well accustomed to getting the best results for our clients. Below are just a few important points to help your business get the best start.
There’s no point in even beginning negotiations if you don’t know what a site is worth. What are other retailers paying? What is your expected turnover? Are there many vacancies in the shopping centre? Any retailer needs to be across the answers to all these questions (and more) before entering into a retail lease. If you’re not sure where to begin, your personalised Rentwise Report (sample below) is a powerful tool to begin your negotiations – or check if you’re paying too much rent on an existing lease. Not many retailers will share their overheads with you (and rightly so) but the Rentwise Report will give you an idea of what everyone around you is paying.
2. MULTIPLE SITES
It’s often wise to consider multiple sites in multiple areas. How can you know what’s available if you don’t test the market? Typically, it’s best to get 3 or 4 sites and compare them. Perhaps rent is lower in one area, but why? Maybe foot traffic is higher in another area? Is this worth the increase in rent?
3. KNOW WHAT YOU’RE PAYING
It may seem basic, but plenty of new retailers aren’t initially across their leases. You need to know the difference between ‘base rent’ and ‘gross rent’, what counts as ‘outgoings’ and what rates you are liable for. It’s typical for a Landlord to discuss the ‘base rent’ for a site, say, $80k. But there are countless hidden add-ons associated with the running of a centre – electricity, administration, rates etc. – suddenly that manageable $80k is out to $110k gross and your occupancy cost may be unsustainable.
4. HIDDEN COSTS
Yes, this sounds similar to the previous point but there are so many potential costs hidden in a lease that we really need to talk about them separately. Nearly every retail lease will have built-in start-up costs designed to gouge unsuspecting tenants. These may include a one-off promotional fee, CAT 1 costs, a design review fee and more, all on top of your fitout costs. Proper negotiation can mitigate or even remove these. Storage, for example, is rarely mentioned in negotiations but can cost you thousands each year.
Starting a retail business is a costly, stressful process. Often, in an effort to attract tenants, shopping centre landlords will offer monetary incentives to help with the fitout. This will typically be quietly built into your rent, however, it can help overcome the high barriers to entry that opening a retail store may carry. It’s important not to be blinded by the incentive though. There’s no use in getting yourself a huge incentive if you can’t pay the rent in 2 years time.
You don’t only negotiate on rent. The term of your lease is also important to the value of your lease, and by extension, the value of your business. There’s a balancing act here though. If you sign a long-term lease and your business struggles, your Landlord could attempt to hold you liable for the rent across the term of the lease. Sign a short-term lease, and you might find yourself without a premises in a few short years if your landlord decides to renovate, or if somebody else offers more money for your site at renewal.
7. DEVIL IN THE DETAIL
Retail Landlords write retail leases. This gives them an immediate advantage. It probably isn’t surprising, but leases aren’t written with the tenant’s best interests at heart. Often, even after negotiation, you might find clauses in the lease that are nothing like what you agreed. This is where it is important to have a leasing professional working for you to carry out due diligence. Landlords have been at this game for decades. Don’t let them slip a clause past you that you’re stuck with for 6 years.
8. RETAIL LEASE REPRESENTATION
This is the big one. There are so many clauses, hidden costs & negotiation tricks in a retail lease that even experienced business owners can be caught out. It’s unreasonable to expect an operator to be across everything in their own business, as well as the cloak-and-dagger world of retail leasing. Landlords know this, and they prey on it. Retail leasing representatives can help get you the best deal available. They have the knowledge, experience and connections within the industry to efficiently wade through all of the above, letting the business owner focus on what they do best.
A good retail leasing representative can guide you through from the very beginning of a deal. They can identify good sites, benchmark them, present them to you and then negotiate the commercials on a site you think works for you.
Call us on 1300 33 44 32 to find out how Leasewise can help you.