05 | June | 2018 | Northcape

“The good oil”, an old Australian expression that refers to the practice of giving reliable, sound and truthful advice on a given subject - I thought this was an appropriate name for my blog.

The following articles have been written by me and primarily relate to retail property leasing and more broadly the retail industry in Australia. They are designed to be interesting and to assist retailers, however from time to time I will also make comments and observations about economics, geopolitics and social affairs here in Australia and overseas that I believe have a bearing on the retail industry.

All articles that I write are my own personal views and whilst I take great care when researching all subject matter, anyone reading these articles should do their own research and should not rely on any views expressed in my blog. You should always do your own independent research to satisfy yourself before embarking on any business venture.

I hope you enjoy my blog, “The Good Oil”

Cheers
Michael

Location, location, location …

I was recently appointed to act on behalf of a retailer who had been having difficulty negotiating a new lease with his landlord on a potential new site within his shopping centre.

Up until my appointment, communications between the two parties had completely broken down. Whist both sides were keen in principle to relocate this particular retail business to a better location within the centre, they just couldn’t come together on the commercial lease terms.

On reviewing all of the facts surrounding the situation, I learned that this retailer had quite a strong business, but it was currently located at the far end of the shopping centre, with no major tenants nearby. This section of the mall was about to be redeveloped and the retail tenancy mix altered to the point where I thought staying in the existing location would have been detrimental to my client.

By contrast, the alternate location proposed by the landlord was very close to a strong supermarket trading at over $50M pa – the surrounding precinct was also going to be refurbished and would soon include a second supermarket which would undoubtedly generate a huge amount of foot traffic.

Whilst my client agreed that the proposed new site was a better location, he was very agitated about the fact that the landlord wanted 50% more rent for the new site. The interesting fact was that this retailer still had about 2 years remaining on his existing lease, so the landlord was quite content to leave my client in his existing shop, unless he was more realistic about paying a market rent for the new site. Importantly this was not a forced relocation, the landlord just thought that offering the new site to my client was the right thing to do – it was good for him, good for my client and right for the centre’s tenancy mix (something which I completely agreed with).

Before I commenced negotiations with the landlord, my client and I had a robust debate about what we thought was a fair market rent. My client cited lower rents that other retailers where paying throughout the centre, so he could not accept that the landlord wanted to charge more rent just because he was making improvements to the centre.

Of course my objective is to always achieve the best possible commercial deal for my client, but the best deal doesn’t always mean securing the cheapest rent, it means securing the best possible location on the best commercial lease terms.

I did think that the landlord’s asking rent for the new site was on the high side, but not to the same extent as my client. The other important fact that my client kept glossing over, was that this was not a market review, nor was it a forced relocation, so the landlord had absolutely no obligation whatsoever to offer the new site or negotiate the rent. In fact the landlord could ask for whatever rent he desired as my client was already bound to a legally binding exisiting lease for a number of years.

I had to confront my client and be honest with him, so I asked him a few simple questions;

Which was the better location in terms of adjacent major retailers, the existing shop or the proposed new site?

Which location would have the highest foot traffic?

Which location was likely to generate incremental sales and profit growth ?

Which location was going to increase the profile of his business medium to long term?

If you don’t embrace this opportunity and be more realistic on the rent, what is the long term future of your business in the current location?

I am sure that you can guess what my client’s response was, of course the new location was superior in every way, so my client started to realise that he should be more realistic about how much rent he could pay. Remember, the landlord didn’t actually have to offer the new site to my client, so I reminded him of this fact and the alternate future if he stayed in the old location.

In the end we agreed on revised leasing parameters and I successfully negotiated what we both thought was a good lease deal on the new site. I managed to reduce the asking rent by 20% (in addition to gaining some leasing incentives) but yes, the new rent was higher than the current shop’s rent, but in our opinion it was worth it. We had secured one of the best locations in the shopping centre and my client was confident that increased profits that he would generate from this new site, would more than cover the new rent, many times over in fact.

We secured the future of his business by observing an old real estate maxim, “always go for the best location ! Location, location, location……” !