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Leasing: Negotiating The Contract
Thu 27 September 2007 - 12:14 pmLegal
Stephen Spring delves deeper into the leasing contract, and the rights and obligations of tenant and landlord under a lease agreement
Yes, leases can be boring, but for most retailers, a lease is probably the most important document they posses. They can appear complicated and hard to read, but all leases are based on the same principle—a tenant has use of a specific piece of land or building for a fixed period of time in exchange for a fee commonly known as rent. It’s that simple.
The lease document itself controls the rights and obligations of the landlord and the tenant and anything likely to happen during the period of occupation. Before you sign a lease ‘caution’ is the watchword, and it’s advisable to seek professional help when going through this process.
Many retailers are fantastic at merchandising and stock management, and most have great people skills, but often their eyes glaze over when contracts are put before them. In retail leasing, there are quite an array of documents to consider, so if this type of retailer sounds like you, it’s vital to get assistance from a competent lawyer or a lease coach. These people are familiar with the leasing process and will protect you if you get into a dispute with your landlord.
Let’s face it, lease documents are pretty dull, but become extremely important if anything goes wrong. They are also the culmination of many months of your hard work selecting sites, so making sure the lease reflects your deal should be of paramount importance.
Once you’ve decided on your top spot, its time to do the leasing deal. Either a tenant or landlord can make you an offer to lease a shop, even if you are not using a lease coach. I recommend you let the landlord make the first offer and it must be in writing. That document will set out all the details such as the shop premises, the area of the shop, the retailer's trading name, the type of use of the shop, the proposed commencement and termination date of the lease, the rent and other charges, GST obligations and often many other factors. There might be bonds or bank guarantee requests, or a list of fixtures and fittings that may be offered or needed with the shop. It’s a starting point.
Prospective retail tenants must also obtain a blank copy of the proposed lease along with the letter of offer. This enables a retailer to assess liability and risk under the lease before getting too involved in the deal. Retailers must be prepared to walk away at any time during the lease negotiation process.
The lease itself details the rights and obligations of tenant and landlord and must be read very, very carefully. If retailers took more time to read and understand the lease before they entered into them, there would be fewer disputes.
Leases are often in a standard form and in a number of parts, although there are many variations. Some are long-winded with sentences that seem to go on for weeks. Others are written in simple plain English.
Nearly all leases have a schedule. This is a list of numbered items that vary with each particular tenant, such as the tenant's name, rent, premises, term, addresses etc. For example, item one in the schedule might be the commencement date. Thus, when you read the clause dealing with the commencement date, it will refer to it by reference to what's written in item one.
Then there's the lease itself with the detailed clauses dealing with matters such as rent disputes, repairs and so forth and often a place for special conditions that vary from tenant to tenant. Common nowadays are the rules of the shopping centre (if that's where the premises are located) included with the lease. If a tenant agrees to the terms set out in the letter of offer, sooner or later the schedule will be completed for that retailer prior to signing.
Don’t forget leases are written to protect the landlord and go into great detail about landlord's rights and tenant's obligations, covering all eventualities during the lease term. For example, leases detail the amount, timing, manner and method of rent payments, the implications of not paying rent and what happens in the event of default or receivership of the tenant.
Retail leases often cover the specific use of the premises and precisely what the retailer can sell. This is important for shopping centres that want to control what tenants sell to maintain a balanced mix of speciality shops.
For tenants, usage clauses should be as wide as possible. It’s not uncommon for retailers to want to sell something after opening, but find it’s not included in the usage clause. Their landlord says “No, you cannot sell it,” or hits them with a rent increase.
The lease also covers insurances, cleaning, and plant and equipment breakdowns. Many other obligations such as directors or personal guarantees, transferring the lease to another retailer or subletting are covered. In fact, most questions are generally answered simply by reading the lease. For example, what happens if the premises are damaged beyond use? What happens at the end of the lease? What happens to the fixtures and fittings and who owns them if the premises are abandoned? It’s all in the lease.
Reading the Risk
The reason you require a blank lease at the very start of the leasing process is to allow you sufficient time to read each clause and think seriously about your own circumstances and how it will affect you if the landlord needed to rely on it in legal proceedings against you. If you don't agree to the clause, you can always negotiate to have it amended. Every lease is negotiable, even if landlord's lawyers say otherwise. It's surprising how many retailers just accept very onerous lease clauses. Read the lease and the offer together and carefully check the rent and other charges are affordable. Will meeting the lease obligations cause you too much financial pain if something goes wrong?
If you need to negotiate, now is the time. After the lease is signed, it’s too late. Offers and counter offers commonly go back and forth many times until both landlord and tenant agree on the commercial terms, or disagree and part company to look at other opportunities. Remember, always be prepared to walk away.
Prior to finalising the lease itself, the landlord must issue a disclosure statement. This document discloses key information in a summary form including matters such as development proposals that may affect trade, trading hours, tenancy mix and so on. The landlord also may ask that a tenant disclose matters to them. It's all about being open and fully informed prior to signing on the dotted line, so these are detailed documents that must be read and understood.
If a retailer is comfortable with the final negotiated commercial terms and the final lease and disclosure statement, he or she can formally accept the offer and, subject to the lease terms, make the agreement legally binding. You can see that a lot of work goes into the documentation prior to signing a lease because it's too late once it’s signed. That’s why I encourage all retailers to keep their pens in their pockets until the very last minute.
An important issue arises when a potential tenant has agreed on the commercial terms but the fit-out costs are unknown. My clients are encouraged to develop a detailed robust business plan that includes comprehensive estimates of fit-out expenses. Why? Well, there are two components with fit-outs: one is the cost of the fixtures and fittings paid by the tenant; and the other is works required by the landlord and completed by its contractors, and these should be calculated before you commit. This will also give you a sound basis to request a fit-out contribution from your landlord.
Eventually you will have two clean printed copies of the lease with all the agreed terms. Keep this and all other documents in a safe place, but before you do, check all these carefully to ens
ure the final documents reflect the agreed position. Many retail tenants have inadvertently signed a lease with mistakes requiring rectification.
Do not relegate the lease to the bottom draw. In many respects, a lease is ‘alive’. Critical dates must be observed by the landlord and tenant. Retail is very dynamic and lease documents signed years ago may not reflect the commercial reality of today. Failure to observe some dates and developments can have disastrous consequences that may lead to a painful business failure or simply cost the retailer money because they don’t know.
Finally, retail leases are covered by State legislation and the legislation always overrides the lease. For this reason alone, if you are not sure, get specialist help and avoid potential wallet ache.
Stephen Spring is a consultant for Australian Retail Lease Management. He can be contacted on (02) 9968 4775 or visit www.retaillease.com.au
This is very general advice only and not specific legal advice. Check with your advisors prior to signing any lease transactions.
Get The Best Deal
The landlord is the seller, the tenant is the buyer. If the landlord starts to dictate to you before you have even signed up, just imagine what it would be like when you are contractually bound. Negotiate on a number of properties simultaneously and play one landlord off against another. Some landlords and their agents have egos the size of the Nullarbor. Who cares? You are the customer and the customer is always king.
Be prepared to walk away. Think about the worst things (within reason) that could happen to your business during the period of occupancy. If the deal is a bad one, walk away now because it could get worse. Many business failures can be avoided if people just said “No”, instead of “Yes”. Don’t get suckered into that bad lease deal if there is a slight inkling that it’s not right.
Keep quiet about your success. I’ll never forget the landlord who would walk around the carpark of the shopping centre he owned and make a note of all the shiny new cars that belonged to the tenants. Boy, did they get a rent shock when their renewals came up. It’s unlikely you’ll want to relocate if you are making money. Don’t you think your landlord knows that too?
Keep your cards close to your chest. I’ve seen tenants get really excited when they look at retail space for rent. They fall in love with the idea of being in business and they can just picture it right there. Their eyes become bright; their body language says it all as they dream away. They want that space. And they are prepared to pay through the nose for it. Don’t you think the landlord is looking out for those “buying” signals too?
Beware when the lease ends before it starts. All jurisdictions in Australia give you a minimum of years term, if that’s what you want. But let’s say you open just in time for Christmas, it will also mean you close in the same time in five years. Do you want to work all year and miss out on Christmas trade? Probably not. Best to think about when the lease ends before it starts.
Ask for more than you need. It surprises me how little inexperienced tenants ask for. If you want 6 months rent free, ask for 12. If your rent budget is $50,000 per year, offer $25,000. Negotiation is a process, not a once off event. If you won’t get what you need in one thing, ask for something else. Know the offers, read the leases, trade off one thing against another, know the market and haggle.
Bargain hard, but diplomatically. There’s nothing wrong with negotiating hard to get the best deal. You are out to win the best deal you can. You get one shot at it. Don’t you think the landlord is out to win? How do you think the major shopping centres became so big in the first place?
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