Talking About Nuts and Bolts
You can renegotiate your lease agreement at any time, you just need to have valid reasons and strong arguments, said Szymon Łukasik, Head of Retail, and Magdalena Sadal, Head of Retail Research & Advisory at Cresa Poland.
The typical lease length on the retail market is five years. This time passes by quickly. Are renegotiations a formality?
Magdalena Sadal: Signing a lease agreement is never a formality. Renegotiations may be easier in that the tenant and the landlord know each other having worked together for several years and are aware of what went well and what didn’t. So they are more likely to talk about nuts and bolts, not only about promises. Based on an analysis of the on-going cooperation, the tenant decides whether to stay or close down a store.
When should the tenant inform the landlord about it?
Szymon Łukasik: The cut-off date by which a lease is to be renewed or terminated is usually set out in the lease. I would, however, advise anyone against leaving renegotiations until the last minute. It’s best to start a year or a year and a half before the lease expires, especially if you are anticipating complicated negotiations, or planning to expand or relocate.
Is an automatic lease extension possible?
Sz. Ł.: Yes. That’s why before we sit down at a negotiating table, we should carefully reread our original lease. There is no limit on what you can include in a lease under Polish law. You can specify the duration and conditions of a lease renewal, or state that lease conditions are non-negotiable. That’s why it’s good to know lease provisions and keep deadlines in mind. Missing deadlines may have serious repercussions including the loss of a store if your landlord is not interested in renewing a lease with you and has a waiting list of tenants wanting to occupy your space.
Does this happen frequently?
Sz. Ł.: A lot depends on the landlord’s position. Some owners of Poland’s leading first-rate shopping centres enjoy a strong bargaining power and can dictate conditions in the process of tenant selection. Prime shopping centre leases are usually for five years and contain no renewal option or provide for a renegotiation option. Rents at such retail schemes tend to rise or remain flat at best.
Leading shopping centres have always operated on their own terms, what about others? Can we gain some savings through renegotiations?
M. S.: Amid high retail space saturation or increasingly fierce competition amongst landloards, tenants do stand a chance of negotiating lower rents. Reasons for renegotiating financial conditions may include falling turnover and footfall levels or even redevelopment of a road or temporarily poorer accessibility.
So it’s worth making the effort, isn’t it?
M. S.: Of course it is, because even if you get a small rent reduction, usually calculated per square metre, you can make quite substantial savings annually. The art of negotiation is quite an important part of doing business. Tenants who lack the necessary skills should seek support of a professional advisor who will handle nearly the whole process for them and achieve impressive results.
Can we renegotiate our lease agreement when it is still in force? In what situations?
Sz. Ł.: You can renegotiate your lease at any time, whenever you have valid reasons and strong arguments. Let me give you an example: a tenant has a well-performing store until their property manager sets up stands right in front of the store. This results in lower footfall and profits. What to do then? Go to the landlord and try to negotiate removal of the island. During the negotiations the tenant may have to pay a price such as a slightly higher rent, for instance. That’s why the tenant and the advisor must prepare well for such talks and calculate what pays off better. It’s just an example, but you can renegotiate a variety of lease provisions or add new ones. These may include better external lighting, intensified marketing activities or the tenant’s use of advertising space at a retail scheme and many other things.
M.S.: In short, you can renegotiate your contract whenever something that is not provided for in your lease happens. They may include reasons attributable to the landlord or circumstances beyond the landlord’s control when there is a change of law or in operation of a shopping centre.
It therefore makes sense to prepare well for talks either on your own or with a good advisor. What else can strengthen a tenant’s bargaining power?
M. S.: As we’ve already said, documented lower turnover levels due to a major reorganisation of a shopping centre are the most frequent concern. Other issues will include stands, new opening times of a shopping centre, a flooded car park or a damaged ceiling. A lower turnover level may also be caused by changes in the competitive environment such an opening of a new retail scheme nearby which will substantially reduce footfall volumes promised by the landlord. The tenant may also see its profits fall if a category killer establishes a presence within the tenant’s shopping centre - a category killer is a retailer that carries a large product assortment and obtains a massive competitive advantage through pricing and deep market penetration.
Can the last two developments force the tenant to vacate a shopping centre?
Sz. Ł.: Unfortunately, yes. It’s the same with retailers in dire straits who have to close down some of their stores. Landlords naturally won’t be happy about it, but this does not mean that tenants will have their hands tied. A poorly performing tenant in a shopping centre is a problem for both parties. If the tenant keeps raising an issue, the parties will finally sit down at a table to solve it.
M.S.: We must be aware that in such a situation the landlord will attempt to minimize any financial or image loss, which may result in the tenant vacating the shopping centre. This is possible only if the outgoing tenant secures a replacement who will not cause any confusion and will not require the shopping centre to be remodelled or repositioned on the local market.
In a nutshell, what would you advise tenants? What should they first and foremost focus on while preparing for lease renegotiations?
Sz. Ł.: Irrespective of the reason for and time of renegotiations, two issues are critical: good preparation for discussions, that is documents and calculations, and keeping calm during the discussions. Door-slamming really serves no-one and at the end of the day both parties need to reap benefits from this business. A compromise can be reached only by peaceful methods.