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4 of 5: Tackling rental overheads - negotiating mid-term

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 three 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:

  1. Never pay the ‘recommended retail price’
  2. Every ‘lease event’ is an opportunity to re-align lease terms with market conditions
  3. Lease terms can be negotiated mid-term.

Read part 1 of the 5 week series here>>

Read part 2 of the 5 week series here>>

Read part 3 of the 5 week series here>>

PART 4

Lease terms can be negotiated mid-term.

When there is no ‘lease event’ such as a market rent review or lease renewal to trigger negotiations around base rent or commercial terms generally, it is still possible to initiate discussions with the landlord around re-aligning lease terms to business performance.

These are never easy negotiations as the landlord has every right to expect you to meet your obligations under the lease until it expires.  However, when the alternative is most certainly the failure of a store and having to vacate the premises mid-term, many landlords will work with the retailer to implement either temporary or permanent measures to allow the business to remain viable.

Many retail landlords collect monthly gross sales (turnover) figures from lessees and are very aware of the key retail benchmark of ‘occupancy costs’ as a percentage of turnover for each store. Landlords need to be aware of ‘risks’ to their business as well as ‘star performers’ who may warrant a better location in the centre, a duplicate store in the same centre or even a new store in another centre owned by the same landlord.

Over the course of a single lease cycle, market conditions can change dramatically. Changes in buyer behaviour, technology and competitors, as well as changes to the retail environment such as a redevelopment of a centre with ongoing construction and even changes to legislation can all impact negatively on sales.

At the same time however, annual rent increases built into the lease ensure occupancy costs continue to rise resulting in margin erosion – often to the point where the business is no longer financially viable.

When it’s clear your business is under significant financial distress and there’s no opportunity to improve the situation through positive sales growth – that is, as a retailer you’ve done everything possible to maximise sales – then your only option is to formally request assistance from the landlord irrespective of when your lease term ends or when the next lease event is due to occur.
Understanding the underlying cause for the poor performance will determine the strategy for discussions with the landlord, but invariably the landlord will need a compelling reason as to why they should offer rent relief during the lease term and financial data to support your case. You must also be able to present options for correcting the situation as well as know what benefits the landlord will get from agreeing to provide the requested relief.

Sales history showing the decline in sales along with other key retail metrics will help to paint a clear picture of the situation for the landlord. If negotiations progress, you may also be asked to provide actual P&L’s for the business to show if it is actually profitable or not and how operating costs are being managed.

Depending on the specifics of the situation, mid-term requests to re-align rent with performance may result in a temporary agreement providing rent relief for a set period, or could even trigger entering into a brand new lease with re-aligned terms. The goal is to bring gross rent or ‘occupancy costs’ back in line with turnover to a percentage that falls within a range consistent with stores with the same permitted use as yours and considered high performing – or at least financially viable.

These negotiations can be drawn out and difficult, but when the alternative is severe ongoing financial distress or even complete business failure, it is worth engaging a specialist retail leasing consultant to work with you to achieve a better outcome.

If you’ve found the ‘Tackling rental overheads’ series useful, tune into a free webinar with Kyle next week to hear more and ask him your questions.

Register now for our online webinar ‘Tackling rental overheads’ on Thursday, 1 June. 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.

Register here for the webinar >>

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.