3 of 5: Tackling rental overheads - maximise lease events
Rental overheads are the biggest challenge keeping retailers awake at night, according to Inside Retail’s 2017 Australian Retail Outlook. Leasing expert, Kyle Swain, explores the current issues and trends in leasing and the best ways for retailers to negotiate better terms.
By Kyle Swain, The Leasing Department
Over the past two weeks, we have examined the issues and trends making rental overheads one of retail’s biggest challenges, and I spoke of the top three things retailers should consider when seeking to reduce and manage their rental overheads:
- Never pay the ‘recommended retail price’
- Every ‘lease event’ is an opportunity to re-align lease terms with market conditions
- Lease terms can be negotiated mid-term.
Every ‘lease event’ is an opportunity to re-align lease terms with market conditions. If you find yourself in a lease where your rental overheads are just too high to sustain your business, every ‘lease event’ such as a market rent review, lease renewal, exercising an option term or tenancy dispute is an opportunity to re-align the terms of your lease to current business performance.
When any ‘lease event’ arises it is crucial that you understand how your business is performing against critical retail benchmarks so that you are prepared to maximise the opportunity the lease event provides.
A ‘market rent review’ is without a doubt the most obvious and best opportunity to negotiate a more sustainable rental position for your business and very favourable outcomes can be achieved if handled correctly.
The process and timing of when you need to act can vary depending on the state your lease is held in and whether it is a mid-term market rent review or a review associated with exercising an option for a new term.
Your lease will contain a section on ‘base rent’ and ‘rent reviews’ where the specifics of a market rent review covering the exact process and timings you need to follow will be outlined.
To give one example, I’m currently working on a market rent review for a client with an initial lease term expiring in June 2018. The lease allows for a window not less than six (6) months before the expiry date and not more than twelve (12) months before the lease term ends to ‘exercise the option term’.
Because the lease is held in Queensland, we can provide the landlord with a notice requesting an ‘early determination of market rent’ before the lessee has to decide if they wish to continue for the new term. Importantly, the window for requesting the early determination is the three (3) months prior to the window to exercise the option term – a full 12-15 months prior to the current lease expiring.
In this example, the lessee retains significant leverage in the negotiation process. If the rent proposed is higher than the business can afford (or wants) to pay, and a more reasonable rent cannot be negotiated, or achieved through an independent valuation process, the lessee still has six (6) months to explore other options. This may include relocating their business at the end of the term, or at least letting the landlord know that this is a possibility, so that the landlord may be willing to agree to more favourable terms rather than lose the tenant.
The other major opportunity to re-align lease terms with market conditions, is the ‘lease renewal’ at the end of a lease term. As with the example above, every lease and every state legislation has specific guidelines around the process for renewing a lease. Being aware of the processes and the exact dates for your renewal can vastly improve your chances of getting the best rental outcome possible.
If nothing else, start early! If you’re trying to renew a lease that expires next month – or even in the next two or three months – you will have very little bargaining power to negotiate an outcome which positions your business to be financially viable for the full term of the lease. Tune in next week, when we’ll discuss the opportunity to negotiate lease terms mid-term.
Register now for our online webinar ‘Tackling rental overheads’ on Wed 31 May. Free for NRA members
In this interactive webinar, Kyle Swain will discuss his top tips for negotiating better lease terms and reducing your overheads. There will also be a Q&A session at the end of the webinar so you can ask those burning questions about all things tenancy and leasing. So, if you’ve been wanting to know more about what you can do to minimise your rent and make sure you’re paying the rent amount that is right for your business, here’s your chance to speak with an expert.
NRA members can also contact The Leasing Department for a 15 minute complimentary consultation. Following initial contact, members can choose to formally engage The Leasing Department to act on their behalf.