Tips for Tenants

• Particularly in the case of shopping centre tenants – remove your dazzling 3D sunglasses! Ed Hardy – a leading fashion label attested to by artists such as Madonna – couldn’t make money in Australian Westfield Centres. There are many tenants that make an insufficient living in shopping centres. Realistically, not emotionally, project your sales and expenses before entering into a Lease. Factor in the matters outside your control – namely the introduction of competitors into the Centre. The truth is if your category is doing very well and the Landlord is having access to your figures, the Landlord may then introduce someone else in your category, unless you have negotiated an exclusivity clause.
• Realise your best bargaining position is whilst you are negotiating your initial Lease. When your Lease comes up for renewal you are in a much weaker bargaining position. At this stage, you have established your goodwill, but of course it is hard to find a buyer for a business without a sufficient Lease term. Also, you have spent many hundreds of thousands on your fit out, thus it is difficult to refuse the proposed increase in rent offered by the Landlord. If you are in a shopping centre it is unlikely that you would have an Option and hence you are in many ways at the mercy of the Landlord. Thus it is in the initial Lease deal that you have the strongest bargaining position. If possible seek to negotiate an option term.
• Do not be pressured into signing a Lessee’s Disclosure Statement until you have properly recorded the representations that have been made to you in Lease Negotiation.
• Do not rely upon oral statements from leasing agents. Make sure any promises are recorded in writing in the Disclosure Statement and preferably also in the Lease.
• Think twice before you risk your house by providing a Personal Guarantee.
• Actually read the documents. Do not be fooled by the statement that these documents are ‘standard’. ‘Standard’ means they are written in favour of the Landlord.
• Obtain appropriate information about the market price for rent. Realise that often lease incentives are provided which are not reflected in the Registered Lease.
• Obtain as much accurate information as you can. A Tenant is at a disadvantage compared to a Landlord in relation to evaluating a site within a shopping centre. The Landlord has access to the trading figures of every retailer in that shopping centre over the life of the centre and has access to all rentals, all rental arrears, information regarding each tenant in all other shopping centres owned by that Landlord and access to traffic counts. Talk to people. Ask adjoining Tenants how they are finding trade. It is amazing how much information you can obtain if you are prepared to spend time at the location. Examine which seem to be the busiest entry and exit points. Ask the Landlord for more information regarding traffic flow and make certain that the Landlord is then prepared to document this. Make use of available services to determine the rentals of adjoining tenancies (bearing in mind of course that some lease incentives may not be present on such reports.) If the previous Tenant defaulted, telephone the Tenant to ask what their view of the location was.
• Realistically consider your position in the market place and realistically analyse your competition. Do not forget to include majors such as Target who over the years have developed better and better specialty areas- for example their fashion offerings and children’s wear are real competitors to specialist operators.
• Be aware of the lengths of the Leases of the major Tenants in the centre. It is of no point taking a Lease on the strength that Woolworths is a Tenant if the Woolworths Lease is about to expire.
• Do not be embarrassed about asking as many questions as you consider necessary from the leasing agent. You are entering into a commitment which over the term of the Lease including the fit out is probably in the order of $1,000,000.00. Think of how much inquiry you go into before you purchase a washing machine or a dishwasher. That purchase only incurs about $1,000.00. Yet many people enter into million-dollar commitments, i.e. entering into a Lease, without taking the appropriate time to properly evaluate it.
• Do not be put under pressure- sometimes the best answer is ‘no’. The problem with many retailers is that they spend so much of their time focusing on their business and insufficient time negotiating with the Landlord with respect to Lease renewal. Leasing is usually the Landlord’s principal business and as we have previously said, the Landlord has access to significant market information. Renewing a Lease under fear that your competitor may take your site is in many cases ill-founded. Sometimes you need to dispassionately look at the figures and really ask “Is the risk worth it?” You are much better to have five (5) very successful stores than a chain of seven (7) stores where five (5) are successful and two (2) are unsuccessful. The real question is can you make money and create a sustainable business in the location.
• Sometimes the cheapest rent is not the best location. A wide frontage is clearly more valuable than a narrow frontage. A high-traffic corner position is much more advantageous than a location that is not in the main flow of traffic. Tenants may think they are doing a ‘good deal’ by having a reduction in the asking price in the rent when in fact the location that they are being offered is far inferior to an alternate location which may have only been an additional $100.00 per square metre in rent.