Retail leases: The Benefits of Being in a Franchise

The times are changing and these days landlords no longer wield as much power in most lease negotiations.

The Leasewise Group represents a number of franchise systems and has found that the last two years were the best possible time to negotiate lease deals and terms, compared to the last decade, and we expect it to only get better for the retailers.

This, of course, is due in part to a soft economy tempered by negative general media sentiment but largely due to an overheated and saturated retail market. In other words, there are too many shopping centres and retail strips in Australia for the size of our market. This has been exacerbated by rents being driven too high in more bullish times. The correction has been taking place and in my opinion will continue to do so for several more years.

The shopping centre environment will be the focus of this article. It’s true that key strips such as Chapel Street in Melbourne and Sydney’s Oxford Street are riddled with ‘For Lease’ signs but these true market areas will self-correct. This is unlike the large shopping centres which, because of their resources, appear to be fully tenanted.

The truth may be different though. If a tenant falls behind in rent on a strip site, a landlord will usually lock them out and it becomes a vacancy; in a shopping centre the landlord can apply a rental abatement (called a promotional allowance) and carry the tenant, giving an impression that there is no vacancy.

Key points

When negotiating a new lease the fundamental points are always the same:

• Secure lease terms that are fair and reasonable based on the business model
• Obtain the best incentives possible
• Include clauses that protect the client from unforeseen charges and events

Franchisors are well placed to assist with these essentials as either they or their representatives have gone through this process themselves with their own sites and other franchised outlets.

Their systems are honed into the likely sales a site will achieve which will have a direct bearing on the rent they can afford. The experience and brand equity a franchisor brings to a location enables landlords to offer more incentives such as cash contribution to fitout and/or rent free periods.

The advantage of a franchisor with negotiating experience is that franchisees can avoid hidden charges that can prove horrendous in shopping centres, charges such as hoarding fees, design review fees, the costs of moving air-conditioning ducts, fire sprinkler heads etc. These charges can amount to tens of thousands of dollars and an experienced franchisor that knows how to avoid these pitfalls can make significant savings for its franchisees.

Negotiations

1. Rent negotiations
2. Lease renewals
3. Advice on relocations/demolition clauses

 

1. Rent deals

Rent information is more widely available and shared in today’s market than ever before. In the past franchisors were often pitted against each other by leasing executives who have one singular advantage – sales data. If a centre is performing well, landlords will use the data they collect from tenancies to lure a new prospect and base their rent on this data.

Of course, established franchisors have a better handle on whether this data is legitimate or not. Inexperienced prospects can often agree to a rent that cannot be sustained for the term of the lease. A franchisor these days will validate data within the network or use external information providers to validate it.

Shopping centre rents can be further falsely inflated by the fitout incentive carrot. Basically if a rent of $150,000 per annum is attained by providing $100,000 fitout money, the real rent amortised over the term of the lease is $124,000 in the first year, as franchisees have in effect paid for the prop up.

2. Lease renewals

Lease renewals can be quite traumatic for franchisees. The shopping centre industry in particular is known for seeking increases of 30 to 60 percent at a renewal of a lease. Although this practice has petered off a little during the last two years it does come up in sites where a centre judges that a store is over-performing.

The centre will give no credit to the operator and franchisor and grab maximum rent based on their perception of what the operator can afford.

This practice can denigrate further when a leasing agent markets the site to a competing franchisor using the sales figures the current operator provided to the centre. Although illegal, it does go on.

Franchisors who communicate well within their network and do not get involved in this (because inevitably it happens to them) are well placed to lift the burden from the franchisee and get the best possible result.

3. Relocations and demolition 

Relocations and demolition clauses can be used to great advantage or can be a burden to a retailer.

These clauses can be quite technical, however an experienced franchisor is well placed to negotiate a better result for a franchisee because they are usually enacted when there is a major development, and this gives the franchisor the opportunity to bargain for a better location, fitout payment and rental abatement during the development.

A demolition clause usually means that the retail space is needed for building works and compensation for the balance of the lease is due to the leaseholder. A franchising system that has proper financial reporting provides the advantage as most independents do not have the data and reporting capability to maximise the return.

 

I remember a time when franchisors would say to me “Listen, can you assist with the rent negotiation, but I don’t want to upset the shopping centre because they may not give me a site in future developments”.

This thinking has changed and all franchisors now deal vigorously with landlords and provide the best possible information and representation to their franchisees, realising the power they have and how important each franchise unit is in the chain.

Ange Kondos is managing director of The Leasewise Group