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.