Welcome to my blog, “the good oil”…….
The good oil, an old Australian expression which refers to practice of giving reliable, sound and truthful advice on a given subject. I thought this was an appropriate name for my new blog which we officially launched today. Every month I plan to post a new a blog which I hope readers will find informative and relevant, especially those of you who are retailers.
Right now there is a lot of change occurring in the retail industry, whether it be new retailers entering the Australian market for the first time, ongoing impact of the internet and social media or the sluggish state of the economy. I want to make this blog socially current, so the subject matter will vary quite widely depending upon whether or not I believe it has any relevance to the retail industry – as a result my blogs may include economic, political, social and technological news & information from both Australia and overseas.
I also wish to share information on practical every day retailer issues which I hope may help improve your bottom line, especially when it comes to matters related to your lease. For my first blog I am going to talk about the need to plan for your lease expiry, something which is often left to the last minute, not surprisingly – overworked and exhausted retailers have so many issues to contend with, so I thought this blog may be helpful.
I hope you enjoy it……
“A Simple Plan”
I am not referring to the 1998 Hollywood thriller staring Bill Paxton, Billy Bob Thornton and Bridget Fonda. I am referring to the serious business of preparing yourself for when your lease expires. Whether you are exercising an option to renew for a further term or negotiating a fresh new lease, you need to think about how you are going to approach the situation.
If you have never had any experience negotiating a lease, the process can be a little daunting and this is completely understandable, particularly given that lease expiries generally occur only every five years. It is not uncommon for retailers to file their leases away immediately after starting a new business and hardly ever referring to them again during the course of the five year term. In some cases they don’t refer to the document at all until only a few months out from their lease expiry. Running a retail business in today’s challenging economic environment is a full time endeavour, so it is no wonder that some owners struggle to find time to give this matter any thought.
Following a few basic steps could help you create a simple plan of attack when preparing for your next lease negotiation.
One of the first steps I suggest to all retailers is to immediately locate their lease and read it from front to back. Even if you are quite sure that your lease doesn’t expire for sometime, I recommend you familiarise yourself, particularly with the terms & conditions surrounding rent reviews (including market reviews), lease options and mediation & dispute resolution. It is a good idea to diarise key dates and notice periods in which specific actions need to occur, when dealing with the above matters.
The next step is to ensure that you allow enough time to negotiate with the landlord. In addition to the specific terms in your lease, all states and territories have legislation which provide protection to retailers in terms of notice periods landlords need to give when it comes to lease expiries. That said, it has been my experience that it is better to start talking to the landlord sooner rather than later, regardless of what the lease may state. In some cases you may even consider doing this well in advance of the expiry if the situation warrants it. For example you may be thinking of selling your business however only have eighteen months remaining on the lease. Common sense will tell you that after putting the business on the market and sifting through the myriad of tire kickers, you may only have twelve or less months remaining by the time you find a genuine purchaser. Naturally a prudent buyer may consider the short time remaining on the lease a serious issue and either walk away from the sale or try to negotiate down your asking price. In such circumstances it would be advantageous to commence lease negotiations in advance so that you are able to secure a new five year lease, thereby offering better tenure to prospective purchasers. Of course a landlord is not obligated to enter into advanced negotiations if an existing lease is on foot, however it may be worth pursuing in certain circumstances such as the example above.
After this I recommend collating all key metrics of your business in a logical and easy to read summary so that are able to easily analyse and refer to the data at any time. It is important so that when you sit down with the landlord, you are talking from a position of knowledge, not guesswork. I am not suggesting you divulge confidential information such as your last year’s net profit or owners drawings, but more high level numbers such as annual sales, gross profit and rent to turnover ratio.
It’s also advisable to have a good grasp of economic, political and industry related factors that may be having an effect on your business. An example of this may be latest retail trading figures released by the Australian Bureau of Statistics.
A prudent business owner should also have a good understanding of what is happening within their shopping centre (if applicable), CBD and local area from the perspective of comparative rentals and incentives being offered in the marketplace. This will assist you to determine what you believe to be a fair market rent when it comes to negotiating with your landlord. You should also make enquiries with your landlord and local council about whether or not any development activity is planned during the course of your lease term – this includes tenancy mix changes within your shopping centre (if applicable), major construction, car parking and road changes that may impact your business.
Once you have collated all the above information, it is then time to create a specific strategy as to how you are going to tackle your impending negotiations. We’ll talk more about this in our next segment.