Cast your mind back. The year is 2014, retail seems to have survived the e-commerce scare. The economy is tracking along nicely, and you think frozen yoghurt is going to be the next big thing. You invest, do your due diligence and, before you know it, you’ve opened your very own store.
It’s now 5 years later. E-commerce is still growing, the economy is doing its best impression of the Amazon and froghurt is cursed. Still though, you’re a good operator and your business has grown at 3% per annum. Trouble is, rent reviews are at 5%. After 5 years, you’re just breaking even, and your lease is expiring. Where to from here?
Sadly, this is the position many retailers are finding themselves in today. It doesn’t matter how strong your business is, if you’re being gouged on the rent, you’re going to struggle.
- Back to basics
Based on your turnover, what’s the highest rent you can afford? Drop it by $15,000. Do not go over that figure. It might seem obvious, but many operators tend to overrate their business and its capacity to grow. This isn’t an indictment on the operator, but the economy.
- Never sign the first deal. Or the second.
Seems straight-forward enough, but you’d be surprised how often operators are intimidated by landlords and the thought of losing their livelihoods. Some landlords have even been known to issue non-renewal notices as a strong-arm tactic. In today’s economic environment, it’s just that. Historically, landlords were loath to allow rental reductions. The last 12 months have finally seen a shift in this mentality, though. A model based on perpetual growth is one that’s doomed to failure, and we’re seeing these results now.
- Beware of Refurbishment clauses
These aren’t inherently terrible clauses. If everybody is forced to refurbish regularly, the centre stays modern and your customers are more likely to return. It is imperative, however, that you know exactly what you’re signing yourself up for. There’s little value in negotiating a favourable rent if there’s a vague refurbishment clause that sees you outlay $60,000 in a struggling centre. Understand your liability first by agreeing to an itemised list.
- Keep your options open
Yes, you’ve spent 5 years building up your business and your customer base. Your customers are loyal, and you want to keep them happy. The landlord knows this. They know that many retailers are unwilling to move because of the expense and risk involved – and these are reasonable concerns to have. It doesn’t mean you can’t shop around. If there’s another site with lower rent and a fitout contribution, you’d have to consider it, right? But you’d never know if you don’t ask the question. It also gives you more negotiating power. Landlord unwilling to reduce the rent? They might be more willing if they risk receiving nothing at all.
- Devil in the Detail
Retail Landlords write retail leases. It’s rare for them to do so thinking ‘how can I help this business succeed?’ It’s not uncommon for leases and disclosure statements to contain clauses completely contrary to what was negotiated. Indeed, NSW legislation provides a section in the Disclosure Statement for the Lessee to note down any representations they relied upon during negotiation. If it’s not there, all that negotiating was almost worthless. Victoria has no such legislation.
There are so many tricks in retail lease negotiation that even experienced business owners can be caught out. It’s unreasonable to expect an operator to be across everything in their own business as well as the murky world of retail leasing. Landlords know this, and they prey on it. Retail leasing representatives can help get you the best deal available. They have the knowledge, experience and connections within the industry to efficiently wade through all the above, letting the business owner focus on what they do best.
James Kolacz is tenant advocate at Leasewise.