Top tips for renewing a franchise lease agreement
There has never been a better time in retail for getting the best from a lease renewal situation.
What is a lease renewal? Simply put, the lease is coming to an end and its time to negotiate the terms of the new lease and of course there is always one crucial headline. The rent.
There are really two scenarios that define a retailer’s situation come renewal time. The lease term is ending therefore there is no security blanket (save for ACT and SA), it’s an arm’s length negotiation between tenant and landlord representative. In strip sites there can be an option with a market review, however let’s talk about the shopping centre industry first as it is the domain for many franchised retail systems and the most dangerous.
A lease renewal within the shopping centre industry is a case of the tenant being at a disadvantage even before negotiations start. Why? The centre collects sales data from each tenant so they are approaching the negotiation with a distinct advantage. In the case where a tenant is performing really well the rent requested at negotiation will not be market price, it will be what the centre believes the tenant can afford based on their sales data.
There is also the emotional attachment of having created a business with value for the tenant so negotiating a ‘fair’ rent is almost impossible. The centre’s representative is charged with getting the most rent possible so the tenant will be squeezed, make no mistake.
The only foundations a franchisor has on which to negotiate the best renewal are:
Strength in a business or brand
Although a centre will try and squeeze the most rent or increase based on performance the landlords are not stupid and will know that replacing a good business or breaking its back with too much rent is dangerous long term.
Strong history of performance and rent payments
This still counts for something, believe it or not, however centres are smart at de-personalising this by constantly moving their representatives around to avoid personal leverage.
Using a third party expert to head up the discussions
Just as these transactions are de-personalised by centres, many systems and retailers use the same strategy for the best renewal result. A leasing expert comes to the table with equal amounts of data and neutralises emotion and personalities.
Some franchise systems in retail have had to make the hard call over time and actually walk away from a lease renewal if a ridiculous increase is requested and the centre is unreasonable about negotiation. This can cause some short term grief with a franchisee however if there are contingencies in place this sends a strong message and avoids financial problems for the tenant long term.
When dealing with individual strip sites a tenant who is at end of lease doesn’t have to worry about sales performance being used against them. It’s easy to research the market on realcommercial.com, and to discover the level of vacancies and rents being charged, so a real negotiation and market discussion can take place. The only time a tenant will be in trouble is if a strip is popular and performing well and the lease is ending. The landlord wants significantly more rent and there are no vacancies nearby to relocate to.
This is a rare occurence, particularly in today’s environment but it has and can happen. This is what killed Melbourne’s Chapel Street and Bridge Road and Sydney’s Oxford Street from Darlinghurst to Paddington.
The biggest advantage a tenant can ever have is an option for a further term with a market review of their rent. This scenario is mostly available to tenants and properties in strip sites. A tenant reaches the end of a lease term, if the business is going well they have the right or option to take a further term. A market review is a great way of correcting the rent if it is too high or consequently increasing for the landlord if the rent is too low.
This scenario is still the best reflection of true market forces to determine a correct result for tenant and landlord. In the event the parties cannot agree to market rent there is provision for an independent valuer to objectively assess the market and nominate a true market rent.
This process worked for decades and is the fundamental framework of retail and commercial leasing. Shopping centres killed this and tenants contributed by agreeing to work within their framework.
So in closing the tips for the best outcome for any renewal as always is:
- Know the strength of your brand and business
- Do your research and get external advice as information is key
- Franchisor/franchisee unity is essential as the outcome must serve the ‘system’
There is retail saturation at the moment and sales have been growing at 2 per cent (while many people have been on sale) and rents increasing on a 4 and 5 per cent compounded basis. In our experience rents have been correcting and largely reducing from 10-15 per cent so use this time to stabilise or grow.