Articles

Is it a tenant’s market or a landlord’s?

Your Business August/September 2009
By Ian Jacobsberg

Like many other sectors, the market for rented retail property has not escaped the fall-out from the worldwide economic slowdown. Just how big the impact has been and how it has affected the process of negotiating a retail lease is worth considering.


According to Gideon Trope, leasing manager for a leading developer and administrator of shopping centres throughout South Africa, the negative sentiment in the market has improved slightly, but the number of new retail entrepreneurs looking for premises, especially in our established urban centres, has been affected by the tightening of credit conditions and the lack of start-up capital. This has, however, encouraged landlords to become more negotiable when it comes to specific lease terms, including rental, turnover-related payments, escalation and the length of the lease.


Legally speaking, a lease is defined as an agreement in which the landlord gives the tenant the right to occupy premises for a fixed period of time in return for rent. Therefore, all lease agreements must include:


• The names of the landlord and tenant
• The period of the lease
• The rental amount


A commercial lease is, however, a long and complex document that details how the premises may be used and the relationship between the tenant and landlord. Negotiating a lease can be daunting, and as a prospective tenant there are a number of clauses that you should think about carefully before signing on the dotted line.

These include:


The usage clause
A lease in a centre will usually only allow you to use the premises for a specified purpose, e.g. a coffee shop and quick service restaurant. In some cases, the tenant may even be restricted to trading under a particular brand name.


This would normally occur in the case of a franchise, and if the franchise agreement is terminated for any reason, the tenant will automatically be in breach of the lease.


Where the franchisor has signed the lease, it would usually have done so because it has identified the location as one that it wants to retain, irrespective of a change in franchisee. There will usually be clauses in both the lease and franchise agreement to make provision for the cancellation of the one in the event that the other is terminated.


According to Trope, the viability of a shopping centre depends on having a good tenant mix, i.e. the correct combination of different businesses to maximise the appeal of the mall as a destination. For this reason, landlords are unlikely to be flexible when it comes to this clause.


Merchant Association contribution
Most centres have a Merchant Association; a group that represents the tenants and deals with matters such as parking, use and maintenance of general areas, the marketing of the centre etc. You may well be obliged to contribute a monthly amount (generally a proportion of turnover) towards the administrative expenses of this body.


Refurbishment of your store
You will normally need some time to install shopfittings and equipment before you open and it is unlikely that you will earn an income during this period.


It may be possible to get the landlord to agree that no rental, or at least a reduced rental, be paid during this period. Or your landlord may even agree to contribute to the costs of the refurbishment of the premises. You will, however, be expected to finish the shopfitting and open the shop within a reasonable period of time; usually fixed.


Refurbishment of the centre
Your landlord will usually reserve the right to carry out alterations to the structure of the centre. You will have to tolerate the inconvenience to your customers and yourself during this time, but may also be able to negotiate some sort of compensation for any interruption to the business.


Compulsory trading hours
Most landlords will insist that you keep your store open for a minimum number of hours and days of the week. You will have to take into account the cost of keeping the business open, and in particular paying staff to work these hours, even though it may not be profitable to do so.


Cession and sub-letting
It is very unusual for landlords to permit joint occupancy of premises by different businesses. This is related to the issue of "tenant mix" as the landlord wants to retain control over the number and types of businesses in a centre. Sometimes, sub-letting is allowed, but you will need the landlord's consent in advance.


Option to renew
If the business is successful, you may well want to extend your stay. An option to renew is very common in retail leases, but the landlord will naturally only consider allowing you to renew if you have been meticulous about paying rent and meeting your other obligations during the initial period of the lease.


While landlords are generally prepared to negotiate on certain terms of leases, as Trope points out landlords of large centres can only afford to be flexible up to a point.


If exceptions to the landlord's standard lease are made for every tenant, the landlord will face an administrative nightmare. This will in turn impact on his costs and necessitate rental increases to cover expenses.


You would be well advised to employ an appropriate professional to help you through the process of negotiating a lease. The terms of many retail leases are detailed and complicated and the advice of an attorney with experience and knowledge of both property and the retail sector is essential.


In addition, a broker can also be helpful in pointing out the best location for your store, the commercial viability of the rental and the other financial implications of the lease in relation to the type of business you intend starting.

Talk to a specialist

Ian Jacobsberg

Partner
011 523 6091
E-mail Ian Jacobsberg