Tying the retail knot, getting to know your lease
Your retail lease is perhaps the most complex contract that a retail business relies upon as the foundation to the success or failure of the business.
It’s a bit like a marriage that has the divorce already factored in. Although the principles of rent in exchange for rights over land to market your wares has been around since BC, specific retail lease legislation is only 25 years old.
In this short period of time landlords have become more sophisticated, resulting in retail property delivering consistently stronger returns than any other sector, even though the legislation was originally introduced to level the playing field.
And as retail property investment has become more complex so too has the focus on retail leases, with the consequence being the technology, information and leverage gap between landlord and retailer has widened even further.
Landlords (large and small) invest heavily in the strategic and financial management of their retail leases – it is no longer just about the asset (the bricks and mortar) management. It is far more sophisticated, with constant reviews and assessments to manipulate even higher and higher returns from the same bricks and mortar.
The stark reality is that retailers invest virtually nothing in comparison – keeping the “lord” in landlord.
Every lease has embedded within it contractual and operational events, not to mention essential clauses that are critical to your rights, ongoing operation and the future of your retail business.
Treating the lease (and more so the landlord) as part of the supply chain is a fundamental change needed in retailers’/lessees’ mindsets before you can begin to influence the outcomes along the critical path of the lease.
Some of the areas of influence that are mandatory to strategically managing your lease are:
- The critical path – mapping the timelines and events with the lease and planning the lead times and resources required at each event to influence outcomes.
- Benchmarking and key performance indicators (KPIs) – regularly reviewing and comparing against industry norms and reacting in a timely manner to align occupancy costs.
- Procedures to deal with notices and day-to-day operational issues – who deals with these when you are not available?
- Relationship management – keeping the communication professional and two way.
So when thinking about your lease and the processes of first entering into it, and hopefully renewing while influencing the outcomes along the way, liken this to a marriage.
Where at first the couple meet and commence courting, they get to know each other better and start to understand what each wants from the other, and hopefully they decide to formalise the relationship.
Although there is much excitement about what the new relationship can bring, soon the honeymoon is over and the stark reality sinks in. This relationship, much like the relationship with your franchisor, will have its rollercoaster moments. The best relationship emerges when both parties understand the need to work together.
And as your business develops and grows, there’s the knowledge that there is a use-by date on this arrangement. If the landlord–franchisee relationship is stable and sturdy, despite the ups and downs, a renewal of vows could be a possibility – this of course is dependent on the other partner in this arrangement, the franchisor.
Even if things get tense, though, it’s better to avoid a messy divorce. And that means managing better outcomes for the retail lease.
The takeaway for anyone looking to enter or renew a lease, or buy a retail business, is to look beyond the current lease term and have a strategy for the next lease term, as this is where you will realise the true value and ROI of your business.
And remember …
“Retailers don’t get what they deserve … they get what they negotiate!”
Phillip Chapman is a retail industry expert with a specialist focus on the leasing challenges and opportunities faced by tenants in the retail sector. He is the founder and chairman of Lease1, Australia’s only national retail shop lease consultancy that provides a tenant-only representation service and a lease simulator MiLease – New Rules of Leasing.