Northcape

Property Services

Do I need a professional lease negotiator…?

I was recently speaking to a potential client about representing him in lease negotiations and the inevitable questions arose as to why he should use my firm’s services and what could we achieve for him. Very fair questions, in fact I think all retailers should be upfront about assessing what results they can expect from their service providers, be it a solicitor, an accountant or perhaps a lease negotiator.

Upon talking further to this particular retailer, it was obvious that he was a very experienced businessman with many years in the retail industry (amongst other industries) and had previously negotiated several leases in the past. It appeared that he had plenty time on his hands and the ability to negotiate his lease renewal with a high level of competence, so I suggested that he probably didn’t require my services and recommended that he negotiate the lease himself.

Whilst I was quite confident that I could probably negotiate better commercial lease terms (I had a close relationship with his landlord), I actually think that he secretly wanted to do the deal himself as a personal challenge.

However not everyone has the experience, time or inclination to negotiate a lease themselves, so there are good reasons to appoint someone who negotiates leases for a living;

  • Arms Length – having a professional negotiate for you allows you to be at “arms length” with the landlord, so you can make partial decisions without feeling pressured at any time.

 

  • Market Intelligence – a good lease negotiator will have an understanding of your industry and be abreast of the type of deals being done in the market place.

 

  • Industry Network – this is more relevant if you are located in a shopping centre, however a good lease negotiator should have strong working relationships with most of the large retail landlords and as such, have a better chance of obtaining an optimum result for you.

 

  • Experience – most landlords be it large retail giants such as Scentre Group, Lend Lease, Stockland etc..or smaller landlords have professional leasing executives/leasing agents acting for them. Their sole focus is negotiating leases, day in day out. Many of these leasing executives will negotiate 30, 40, 50 up to 70 deals a year, so they are usually very good at their job. In contrast, most retailers would negotiate a lease once every 5 years, so in many cases these professional lease negotiators have an unfair advantage in terms of experience. Having a professional lease negotiator on your side, evens up the odds a lot more.

 

  • Optimising the deal – many good lease negotiators have worked on the landlord side of the equation at some stage in their careers. As such they should know how to push a deal in terms of rent, what incentives are able to be secured and when to close the deal or walk away. They should be able to drive the deal hard, as they simply have a lot of experience and are focused on a good outcome. This is especially so if the fee arrangement is based on achieving specific outcomes such as negotiating a lower rent and/or securing capital contributions and rent free periods.

 

  • Time (Opportunity Cost) – just like the old 1965 Ned Miller song says, “do what you do well”. Staying focused on your business and leaving lease negotiations to a professional, makes a lot of sense from a time & productivity perspective.

 

Even though there are plenty of compelling reasons to have a professional lease negotiator represent you, sometimes it is simply not worth it. For example if you are about to renew your lease and your existing rent is very low and not likely to increase significantly, then it may be more prudent to simply negotiate the lease yourself.

If however you are trying to renew your lease or starting a fresh lease and there is a strong likelihood that your rent will increase a great deal or you are going to have to pay for a costly fit-out then it is probably a good idea that you seek help from someone that negotiates leases for a living.

Permitted Use……getting it right!

Over the past few months I have come across some interesting cases where clients of mine have had major disputes with their landlords about their Permitted Use.

Permitted Use within the context of a retail lease, defines what a lessee is allowed to sell, so it is very important that the clause is carefully constructed to encapsulate all the desired products and services within the retailer’s range, both now and into the future.

This is especially important for retailers located within shopping centres, due to retail landlords being very particular about their tenancy mix. Generally speaking shopping centre landlords prefer usage clauses to be well defined and very narrow, so that they can control exactly who sells certain products & services.

On the hand smaller independent landlords with one or two free standing specialty shops, are usually a lot more relaxed about Permitted Use clauses, as they are generally not concerned about tenancy mix. If your business is located in free standing specialty shop, nine times out of ten, your landlord would not care nor be aware of what products and services you sell (provided of course they are not wildly out of character).

In a shopping centre environment, the situation is very different – in fact the cases mentioned above, all involved shopping centre landlords trying to restrict retailers from selling specific products and services.

Given challenging conditions facing the retail industry at present, any unnecessary restriction of products and services in your business, could have a detrimental impact on your sales and bottom line profit, so I thought I would explore how you might overcome such problems.

When you next renew your lease or enter into a new lease, one of the very first steps I recommend is to determine what your business is going to look like. By this I mean what are the core competencies of your retail business and what range of products/services are you going to specialise in (eg. I had a newsagent client that was located next to a number of art schools and over time he developed a very close working relationship with these schools and became their primary supplier of art materials. He supplied all manner of items such drawing pencils, fine paint brushes, canvasses, easels etc – he developed a real niche in addition to his more traditional newsagency lines).

Once you have determined what your specific niche is and you are clear about what your business is going to look like, then it is important that you create a Permitted Use clause that covers all of your desired products and services, but has enough flexibility in the wording to ensure that you are not restricted to just those products and services. The reason being that you might like to add or vary your range at a later date, in order to meet future customer demand.

If possible try to use phrases such as “ including but not limited to, retail sale of x,y,z and other products & services normally associated with a…….. ”. Of course you don’t have to use this exact wording, but it is important to use words that are general in nature, so as to give you maximum flexibility.

More often that not, you will have to haggle with your landlord in regard the final wording of your Permitted Use clause, however it is far better to resolve this at the time of negotiating a new lease, rather than becoming embroiled in a major dispute after the lease has been entered into.

What if you have a lease on foot with a Permitted Use clause that is a too narrow and your landlord wants you to reduce or remove certain products/ services that have been part of your range for some time?

Well, this is more challenging, however I wouldn’t immediately give in to your landlord’s demands – when a landlord requests that certain products/services be reduced or removed, it is often a result of another retailer complaining about you selling the same or similar merchandise. If you find yourself in this situation and your Permitted Use clause isn’t strong enough, I recommend that you organise a meeting with your landlord (or Centre Manager/Property Manager) and try to find a compromise. Often there might only be one or two key products that are controversial, so the solution might be as simple as removing these few items from your range or even relocating them out of prominent display. Of course sometimes it’s not that simple to find a quick solution, in which case it may be worth your while to appoint a professional lease negotiator or a good solicitor to help you resolve the dispute.

Of course it is far better to create a good Permitted Use clause at the time of negotiating a new lease, to avoid problems in the future.

 

 

 

 

What to do in a re-development….

Over the past few months a number of my retail clients have been impacted by shopping centre redevelopments. I realise that not all retailers are located in shopping centres, however a lot are, so in this article I thought I’d explore the dark art of shopping centre re-development, how to survive it and navigate through the process.

When a shopping centre is to be redeveloped, a landlord obviously believes there is an opportunity to add more space to rent, so the project is usually underpinned by securing one or more major or mini major tenants. To ensure the redevelopment stacks up financially, a landlord needs to add a significant amount of new specialty retailers who ordinarily pay much higher rents proportionally than major and mini major tenants.

In addition to adding retail space, a prudent landlord will often modernise the old part of the shopping centre (or at least they should do) which means a lot of demolition, construction and almost certainly business interruption.

Depending upon the scale of the redevelopment, it is not unusual for car parks, malls, entrances, common areas and large sections of retail shops to be impacted by construction. In most cases shoppers are also inconvenienced by the works, however this is very difficult to avoid, but that said a landlord is obliged to minimise disruption wherever possible.

Operating a retail business during heavy construction can be very challenging, especially if the number of customers frequenting your shop decreases significantly or worse, the landlord wishes to relocate you.

So what can a retailer do if they have a business in a shopping centre that is about to undergo a major redevelopment ?

  • Most Australian states and territories have specific retail lease legislation that offers some protection when it comes to re-development and relocation. If your centre is about to undergo a major re-development, I highly recommend that you review the retail lease legislation that applies to your particular state /territory.

 

  • The next most important task is to review your lease in detail to understand your obligations and rights as they pertain to redevelopment and re-location. I suggest that you have a competent solicitor also review your lease, just to ensure there are no inconsistencies with your lease and the relative legislation.

 

  • Before any major works are to take place in a shopping centre, a landlord will more than likely formally communicate details with all their tenants. It is imperative that any communications to your retail business are personally directed to you at all times to ensure that any issues involving relocation or redevelopment are brought to your attention immediately.

 

  • If there is a major redevelopment planned, it is usually a good thing and normally beneficial to everyone in the long term – a landlord intending to re-invest in their centre usually means there will be an improvement to the tenancy mix and common areas of the centre which should in theory attract more shoppers. To ensure that you are completely clear about the scope of the redevelopment and how it might affect you, I would arrange a one on one meeting with the landlord/agent to ensure you understand what is going on around you.

 

  • Ensure lines of communication are kept open at all times and that you have a harmonious relationship with your landlord/agent (if possible) – this is very important, particularly during the course of a redevelopment as there are often a lot of unexpected disruptions to business continuity such as intermittent loss of services (water, electricity, air-conditioning etc), as well as constructions noise, dust and vibration. The better your lines of communication with the landlord/agent, the quicker they can respond to these issues.

 

  • When you meet with your landlord/agent and you discover that your shop might be affected by construction or that they wish to relocate you, don’t be alarmed, hear what the landlord/agent has to say. They might actually offer a better location or attractive lease incentives, so I suggest that you do a lot of listening and not a lot of talking at the initial meeting and don’t commit to anything at this point.

 

  • Ask the landlord/agent to put everything in writing to you in the form of a proposal after the meeting to avoid any miscommunication. Once you receive the formal proposal, analyse the information and work out what it means to you in terms of both short and long impact. I recommend that you involve your accountant during this process, as they should assist you with financial modelling in terms of sales projections, cash flows, P&Ls, Balance Sheets etc.

 

  • If you believe that the landlord’s proposal is unfair or that you will be severely impacted by the project, ensure you review the relative retail lease legislation in your state, as most acts have safeguards in regard to these matters.

 

  • Do not be afraid to reject the landlord/agent’s proposal if you believe it is not in accordance with the law or detrimental to your business – if necessary I suggest that you engage a lease negotiator or solicitor to negotiate with your landlord/agent to improve your position.

 

  • If your landlord/agent advises you that there will not be any direct impact to you as they don’t plan to relocate you or your tenancy isn’t affected by construction this is good news, but be wary. It is important that you understand what the landlord is planning to do in the common areas, such as the malls, carparks, entrances, travelators, lifts etc. Very often construction to common areas will result in major declines in customer numbers which may impact your business significantly, so ensure that you understand what is happening and when.

 

  • Once construction starts, it is prudent to create a “Re-development Log” to record everything that is occurring in the centre that might impact your business. Issues such as dust, excessive noise, vibration together with any obstructions to traffic flow within the car park and mall areas, vertical transport etc.. anything at all that could be detrimental to your business – also I recommend that you take photographs wherever you believe it is necessary. The reason this is important, is that in most states/territories a landlord, must reimburse retailers for any loses that arise as a result of excessive business disruption, so the more objective evidence you have, the better your chances of obtaining fair compensation if the need arises.

 

For those of you in the midst of a redevelopment or about to go into one, I hope that the above has been useful to you.

Cheers,

Michael

 

 

“Negotiating – knowing what to give away, what not to give away and when”

In our last article we talked about how negotiating is a process that can’t be rushed. We also touched on the process, in terms of knowing what to give away, what not to give away and when.

In this article I’d like to explore the what and when of negotiating .

Before I embark on a new lease negotiation, one of the very first steps I take is to try to understand what my client’s key objectives are. I really try to hone in on what is important, what is a nice to have and what is not that important to them. Sometimes my clients don’t have this clearly identified and this is to be expected, after all it’s not every day that a retailer negotiates a new lease.

I often ask my clients to actually write down what is and isn’t important to them and to categorise these items in order of importance – I then work through the list and determine whether or not I am able to trade off some of the less important items for other objectives that are more important to my client. I find this approach very useful as it crystalises what the ideal outcome is for my client and they often feel far more comfortable knowing what the game plan is. I actually believe this is the most important step in the negotiation process, knowing what you won’t give away (non-negotiables) and what you can give away (negotiables).

After establishing this and the other key leasing parametres, I make an assessment of the landlord whom I will be negotiating with. Fortunately I know most of the large retail landlords and have a fairly good idea of what their key drivers are. For example, some large landlords are driven by valuation, so obtaining the highest possible rent psm/pa is very important to them, whereas giving large amounts of capital contribution is something that they will give ground on more easily (well…at least in the current market). Smaller landlords generally don’t don’t have access to large amounts of cheap capital, so their incentives are usually in the form of longer rent free periods, so I try to negotiate with these facts in mind.

I recommend that you undertake the same process of trying to identify what is important to your landlord and what isn’t so important – a good way of establishing this is to talk to your neighboring tenants whom might have recently negotiated a new lease. Without being specific, your fellow retailers might have some very useful background information that will help you build up a profile of what the landlord considers important to them. If you deal with an agent or leasing executive who acts for your landlord, they will often reveal how the landlord thinks, so it a good idea to make mental notes whenever you can.

When lease negotiations begin, you must be very clear on the issues that are important to you and what you are willing to give away – try to stick to your game plan, as deviating from it could be disappointing later on. I have seen many situations where retailers have given far too much away and too quickly only to regret their decision afterward.

As negotiations unfold there will naturally be a lot of back and forth communications, so this is where the “when” comes into play. As equally important as “what not to give away” and “what to give away” is when to give concessions away .

After negotiations have opened, I generally only give ground on the least important points early in the process and as we approach the pointy end of the deal, try to hold back on the more important trade offs for as long as possible and only release them if I have to. If I have been fortunate enough to achieve the objectives of my client, then I will not give any more ground at all. If however, I haven’t quite reached our goals, then I will drip feed the last “giveaways” in order to secure them.

It’s imperative to not release your “giveaways” too quickly as you will run out of trade offs and effectively have no room to maneuver.

Recently I was negotiating on behalf of a retailer – my client’s key objective was to significantly reduce their rent and when I mean significantly, I am talking many tens of thousands of dollars per annum. During the course of the negotiations I learned that the state of my client’s fit-out was a source of irritation for the landlord and something that they had wanted to be addressed for many years. Armed with this knowledge, my client and I created a list of cosmetic works that we were prepared to do and were not overly expensive. We prioritised each of these items in order of how important they were to the landlord and how costly they were to my client, starting from the least expensive to the most expensive

In this particular case we agreed to install new LED lighting, upgrade the main shopfront sign and do a repaint of the ceilings and walls, amongst some other minor maintenance issues. The landlord wanted a full upgrade including a new shopfront, ceiling, fixtures etc. however we were not prepared to do this, as the total cost would have been very expensive. As we had already prioritised what we could give in on, we drip fed these items during the course of the negotiations on the basis that the landlord agreed to reduce the rent to a level that we thought was acceptable. In the end we successfully negotiated a new lease, achieved a very large reduction in rent, with a trade off of doing some relatively minor works that actually benefitted my client, as their shop’s appearance was enhanced and contributed to a lift in sales.

One of the main reasons that we were successful, was that we knew what not to give on, what we were prepared to give on and when. I believe if you adopt these basic principles, they will assist you in your lease negotiations.

 

 

 

 

 

 

 

 

 

 

 

 

Negotiating a lease, a process you can’t rush…

Over the past 12 months or so I have been involved in several lease negotiations with retailers where an impasse had been reached with both parties seemingly unable to work through their differences.

In all but one of these cases the deadlock was eventually broken and a compromise reached with both retailer and the landlord being happy with the final outcome. The negotiations were long and tedious, however it couldn’t be helped given the high stakes nature of the areas being negotiated. (more…)

Outlook for the retail leasing market in 2015…

This time last year I wrote an article about the outlook for the retail leasing market in 2014, so I thought we should re-visit some of my predictions, before I give my views about what to expect in 2015.

In 2014 retail rents came back a little, but probably not a great deal, however significant lease incentives continued to be offered by larger landlords which I did predict would occur. During 2014 it wasn’t unusual for savvy retailers to secure capital incentives from large landlords when negotiating new leases, particularly where their shopping centre was undergoing re-development. Smaller landlords generally don’t have the access to cheap capital, so their incentives came in the form of rent free periods. (more…)

Retail lease legislation, your friend……

As a retail lease negotiator/advisor, I come across all manner of situations involving retailers who are encountering problems with their landlords. In many cases these problems are actually simple miss understandings on the part of the retailer who are actually not that familiar with the terms & conditions of their lease.

However there are some cases (and these situations are quite rare) where landlords are simply not abiding by the lease or relevant retail lease legislation. (more…)

Good landlord relationships, a must……!

I was recently speaking to a leasing executive friend of mine who is with a large retail property trust  – we were discussing various issues within the industry, in particular retailer relationships and people who do what I do, negotiate leases on behalf of retailers.

After some banter, the leasing executive became quite serious and said that he really didn’t like dealing with certain lease negotiators and some retailers. When I asked why that was the case, the leasing executive said they were just too difficult to work with and were often abrasive. At first I thought he was having a tacit jab at me, but thankfully he assured me that he was talking about a handful of individuals within the industry, not myself. (more…)

“It’s a tenant’s market”

Over the past few months I’ve dealt with a number of interesting matters that involved retailers who had worked themselves up into a lather about their impending lease expiry. In virtually all cases, the retailer was deeply concerned about their landlord potentially not offering them a new lease or asking for a massive increase in rent. Given the profitability of their business’ (and by extension their livelihood) could be seriously affected by the outcome of how the landlord was going to act, most of my clients were naturally very nervous about their situation, understandably so. (more…)

Lease Documentation – Getting it right…

Happy New Year !…. I believe 2014 is going to be a very interesting year indeed – it will bring some big challenges to the retail sector, but equally I think it will bring big opportunities too. In particular I recommend that you watch the bond and equities markets and perhaps even the property sector, particularly in the US and other parts of the developed world, as well as Australia. I think there’s a big correction coming, however we’ll see if I am right in due course.

This month I thought I would talk about lease documentation, yes I know a fairly dry subject, but one that is very important, I hope you find it interesting. (more…)

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