Staying on top of the multitude of clauses in a retail lease can be extremely overwhelming, often leading to important provisions being overlooked. Getting your head around these 12 key terms is therefore imperative if you want to acquire the best deal when entering a retail lease negotiation.
Can you believe that 60% of all leases do not state an area on the lease, yet rent and outgoings are calculated on a rate/m² basis? You should not be paying rent for spaces such as common areas which need not be included within the rent calculation. Also, understand whether an atypical property shape may influence the rent calculation, for example, is there a poor frontage to depth ratio or is the premises in an L-shape. This may indicate the given rent is a poor estimate of the genuine value of the area.
Rather, seek advice as to the actual square meterage of your tenancy from a surveyor. Special requirements for measuring retail space are contained within the calculation method of Gross Lettable Area Retail (referred to as GLAR).
When negotiating your bank guarantee you should be aware of what has been required of others in the same centre or location to gain a better understanding of benchmark amounts. This research can help tie up unnecessary working capital.
You should also determine whether you can deposit the money into a government-run commercial bond scheme, such as the ‘NSW Government’s Retail Bond Scheme’ in New South Wales.
As a general rule in retail, bank guarantees should not be undated and rather should provide a maximum term after expiry (usually 2-6 months).
Make Good Obligations
A make good clause sets out the requirements of the tenant upon expiry of the lease. With costs ranging in value from a few thousand dollars into the hundreds of thousands, make good clauses are an important obligation to negotiate.
Upon commencing a lease, you should always complete a dilapidation report to record the condition of the premises at the time of the lease entry.
It is important to also understand clearly the make good definition and negotiate if necessary. For instance, if you take over someone’s lease, make sure you only must make good to the conditions you took it over at, or perhaps discuss with your landlord whether it may be mutually beneficial and cost-saving to keep some of the fitout upon the end of lease.
Read more about Make Good obligations.
Redecoration should not be required more than once during the lease term. See what others have achieved and check whether your requirements align with the current market expectations.
You should be aware that the Retail Leases Act prohibits Lessors from recovering costs of lease and disclosure document preparation. Ensure you are not being unlawfully required to pay any costs associated with the preparation of your lease.
Enquire as to whether you can negotiate a gross or semi-gross lease – where outgoings are already included in the rent. Be aware as to whether there are any outgoings you should not be paying, for instance Queensland and Victorian legislation bars payment of Land Tax.
Promotion/Marketing Levy (Shopping Centres Only)
Check what others have achieved and what their levy increases are. Is there an opening promotion levy which others have paid? Know the trends to make sure you are negotiating for the best lease deal.
Pay attention to the words of the permissible use. The definition should not be too narrow to prevent assignment of the lease. Additionally, be mindful as to whether any current tenants hold a permissible use which is similar enough to provide competition.
Although other tenant’s specific incentives may be confidential, leases can still include a clause referring to whether an incentive was paid. Major landlords also tend to report overall trends on incentives. Do your homework to know what incentives you may be able to negotiate for.
Although 5 years is the most common lease term, negotiation to reduce or increase this period is becoming increasingly common. Again, understand the trends to know what you can negotiate for and ascertain the term which will be best for you and your landlord.
Where possible, try and negotiate for an option period which gives the tenant the right (but not the obligation) to enter a further lease upon expiry of the first lease term.
Make sure you have adequate rent-free time to fitout the premises. You should allow four weeks at a minimum, sometimes longer if the fitout required is complicated.
Many landlords require a personal guarantee or covenant. However, not all do. See what other tenants have achieved to negotiate whether your lease should require one and what sum should be expected.
Understanding these 12 key terms will allow for a more advantageous negotiation, ensuring you are equipped to enter the best possible deal. Remember to always do your homework and be aware of market trends and standards to place yourself into a secure and informed position.
This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.