“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.