A Year in the Life of a Retail Lease

After almost 20 years proactively providing support and information to Retailers (Lessees), as well as educating them on all facets of their Retail Shop Lease Contract, their most important contract among a sea of paperwork, we still see a very basic lack of understanding in this area.

As you can just imagine, we negotiate hundreds of retail leases each year, not to mention provide phone support for Australia’s largest Retailer member associations. Still, the bulk of our time continues to be dedicated to explaining the operational and commercial aspects of leases, including the rights of leases.

Business would be much easier if entering into a new lease (renewal/option/greenfield) was as convenient as a set-and-forget event. Unfortunately, there are numerous activities and events that take place each year which modify your lease contract. It is, after all, important to remember that the lease is a living document.

With the ever growing sophistication of Landlords, even in small shopping centres, it is easy to fall into the traps that not managing your lease exposes you to. The amount of paperwork you will have to go through is massive. Here is a small snapshot of the triggers and events you may experience in a typical year in the life of your lease:

• Monthly
  • Sales data provided to Landlord
  • MAT (moving annual turnover) is collated and updated
  • OCR (occupancy cost ratio) is collated and updated — we find that shopping centres track your performance better than a lot of Retailers!
• 30 days before end of financial year
  • Outgoings budget/estimate for next financial year is sent to Lessee, advising new charges
• 30 days before lease anniversary
  • Annual rent review if forwarded to Lessee — this may vary depending on review type i.e. CPI
• Beginning of financial year
  • Rent Invoice is updated with new outgoings charges
• Beginning of new lease year
  • Rent invoice is updated with new rental from annual review
  • Request sent to Lessee to top up bank guarantee/security from rent + outgoings increases
  • Request sent to Lessee for new Certificate of Currency for insurances and indemnities
  • Request annual Sales Audit/Statement — depending on turnover rent clauses
• 90 days after financial year
  • Outgoings Audit is provided
  • Outgoings recovery and adjustment provided — up or down
• 120 days after financial year
  • Rent invoice reflects outgoings adjustment from previous financial year
• Other activities — depending on premises, use and lease terms
  • Quarterly air conditioning service provided to Landlord
  • Annual pest and vermin inspection and service provided to Landlord
  • Annual premises maintenance and fit-out inspection report
  • Monthly
    • Extended trading hours charges
    • Electricity meters read and billed
    • Water meter read and billed

The list can go on … and on …

… But wait, there’s more …

Along with all this, the Landlord is constantly reviewing comparable rents and performances, as they monitor the critical path — balance of term — of your lease. At the time your lease ends, the Lessor would be armed with all of this data and resources, and even the small shopping centre Landlords are planning what your next lease will look like, quite often up to 2 years before your current one is due!

This is why proactive, rather than reactive (end of lease) management of your current lease, as well as strategic planning for your next lease, has become more important than ever.

Even financiers, including current credit facilities are now speaking with us to understand the growing risks associated with retail shop leases in order to continue lending to Retailers.

I find it alarming that the majority of Retailers, with hundreds of thousands of dollars invested, simply leave their leases in the bottom draw!

Is that any way to treat such a valuable asset?

How about you? What are you doing to manage the future and add value to your asset?