Lease Renewal: An opportunity to save

This article originally appeared on National Retail Association.

If your retail shop lease is ending in the next 12 months, start planning today. With most retailers finding current conditions extremely challenging, the outcome of your next lease renewal negotiations could be the difference between your business succeeding or failing.

What is a lease renewal?

A lease renewal extends an expiring lease for an additional term and allows a business to continue a positive rental experience. Smart retailers also see a renewal as an opportunity to improve their current situation by identifying clauses that need amending to reduce risk, and to realign rent with current business and market conditions.

There are several ways an expiring lease can be continued after the agreed term expires. A ‘lease renewal’ involves a new lease. However, an expiring lease can also be extended, without interruption, with an ‘extension’ to the original lease.

Extensions most often occur when there is an ‘option term’ available to the lessee and the lease is extended on the same terms and conditions as the original term with only the base rent to be determined. The method for deciding the new base rent will be documented within your original lease and be either a fixed rent increase or a market rent review.

Exercising an option term warrants an entire article on its own, such are the complexities and differences across each state and territory, so for the purposes of this article we’re focusing on a straight lease renewal and five key actions which will put you in the strongest negotiating position to get the best outcome possible.

5 Key Actions to reduce your base rent on lease renewal

1. Start early

If you have a lease expiring in the next 12 months, start the process now. The very best leverage you have with a lease renewal, is being in a position to leave your current tenancy for another – putting yourself in that position takes time! In some states there are provisions and conditions for the renewal process to start a full 12 months before the lease expires. Some of the opportunities to gain significant advantage in the negotiations may be lost if not started 12 months before expiry. If you wait until the landlord issues you a renewal letter to start negotiations, you run the risk of having to accept the landlord’s terms rather than the terms your business needs to be profitable in the next term.

2. Consider alternative properties

Renewing a lease often requires you to undertake a major refurbishment of your tenancy. At renewal time landlords rarely offer any incentive to sitting tenants for capital expenses, so any works could come at a significant cost to you and your business.

The likely incentive you receive in moving to a different location, could off-set the outlay to refurbish your existing tenancy and make moving virtually cost neutral as well as commercially beneficial for your business.

Again, starting early affords you the opportunity to explore this alternate tenancy (Plan B) scenario which places you in a stronger position at the negotiating table with your existing landlord.

3. Be prepared BEFORE you start negotiating with your landlord

A landlord’s ‘offer to renew’ will remain valid for only 30 days from the date of issue and the opportunity to negotiate is often limited. Therefore, you need to make sure you are 100 percent prepared for negotiations with your landlord and know exactly what outcomes you need to achieve.

Exploring alternate premises, researching market data and benchmarking your businesses performance are all crucial steps to getting the best outcome from your negotiations, but they also take time. Make sure you allow three – six months to pull this information together and analyse it so that you can present the best case for your business.

4. Smart decisions are based on data, not emotion

Decisions around rent, and possible alternate locations, have to be based on the data, not emotion. Too many retailers go broke because they are emotionally attached to their physical shop and location and ignore what the data keeps telling them. As the saying goes – past performance is a good indicator of future performance – so taking a good look at your shop’s performance over the past lease term is critical.

Analysing past shop performance data will give you a clear picture of how much rent your business can afford to pay in the next lease term to remain in business in that location.

Benchmarking your shop’s performance against other retailers in comparative situations is also a key step. Looking at the performance of shops in the same product category, in the same centre and from a similar sized tenancy will provide you with a pretty good indication as to whether your shop (or the Centre you’re in), is performing well or underperforming. Often, that analysis advises the retailer if there’s scope to improve sales in that location, or if the rent is simply too high for its permitted use i.e. selling what it’s selling.

When the analysis paints a clear picture that the rent is too high, and what the affordable rent is for your business, significant market research needs to be conducted to provide market evidence supporting the rent you need to achieve for your business.

5. A lease is more than just your rent

Whilst the primary focus of any lease renewal event is understandably the base rent, a lease renewal is also an opportunity to identify and minimise other potential risks to the lessee (tenant) inherent in a lease. Some of these risks are summarised below.

  • Lease security/guarantee clause. Often after a full lease term, it is possible to have the initial lease security or guarantees relaxed. With five years of trading history, a good track record for paying rent and meeting your lease obligations, it may be possible to have one or all personal guarantors removed from the lease or to reduce the amount of security being held by the lessor on entering a new lease.
  • Permitted use. During the term of your expiring lease, your business may have evolved a little. A lease renewal is a good opportunity to review and potentially expand your permitted use in order to maximise your sales opportunities during the next lease term.
  • Refurbishment incentives. Lease renewals often require the lessee to conduct a significant refurbishment, but rarely offer any fit-out incentive. It may however be possible to at least negotiate a rent-free period during the period of the refurbishment works which often involve the shop closing. In some situations, a capital contribution may also be achievable.
  • Legislative changes. Leasing and tenancy legislation differs from state to state. Its therefore important at lease renewal time to check the legislation relevant for you to see if there have been any changes that could increase your risk profile in the next lease term and ensure those clauses are amended to represent your best interests.

Lease renewals are a great opportunity to reduce risks to your business and ensure the rent you’re paying is proportional to your shop’s performance, so that it remains viable and profitable for the full term of the next lease.

As the tenancy and leasing partner to the National Retail Association, Lpc Cresa is currently offering an additional discount on their already special NRA member rates. Contact Lpc Cresa before 30 November to discuss your next lease renewal and you’ll receive a 20% discount on standard service fees for their expert advice and representation.