Retail businesses, with the exception of stock, have two major fixed costs – staff and premises. Typically retail premises will want long term leases to preserve business goodwill, and what you negotiate today will substantially impact on long term fixed costs. Thinking about the detail now will save significant expenditure over a 10-year lease.
The key issues to consider for a tenant include:
Term – To preserve the value of a business a long term lease is desirable. Personal guarantees are usual with leases, and the contrary view is that a long term lease imposes creditor risks for the future. The best scenario for a tenant is to have short lease provisions but a number of rights of renewal (i.e. a 2+2+2+2+ 2 year lease is preferred to a 10 year lease).
Rent reviews – The standard law society lease now has an option of either a market rent review or a CPI clause (being inflation based). A CPI clause will better enable a tenant to keep the rental to a level which reflects today’s costs. Remember market rent reviews are set at the highest and best use for the premises, not necessarily your particular use.
Business use – The business use described in the Lease is what you can do with the premises as of right. It is best to make this as broad as possible. For example, you might wish to contemplate a coffee stand, LOTTO outlet, or other uses. The best scenario is to say that the business use includes all uses permitted by Council.
Renovation of the premises – If you are contemplating a new fitout of the premises you may be able to entice the landlord to contribute towards the costs. Remember that any improvement in the premises will impact on a future market rent review. At the very least get the landlord to agree that your improvements will be excluded from a new market rent.
Earthquake strengthening – All local authorities are undertaking a survey of commercial buildings now. This will bring about future requirements for earthquake strengthening in the near future. If you lease premises which are not built from reinforced concrete it could well be that the landlord has to carry out some works in the future, which may cause the temporary closure of your premises. In looking at premises it is best to evaluate this risk now, rather than face a major issue later.
Outgoings – Another ‘post Christchurch’ issue is rising insurance premiums. These get on-charged to the tenant, and in some cases premiums are doubling. At the time of a lease negotiation you might like to consider asking for a cap on insurance premium costs, or at the very least factor that into negotiations.
Costs – A change in common practice is that the landlord and the tenant now normally pay their own lawyers. In the past it has been more usual for the tenant to pay the landlord’s legal costs. This can be significant when you do not have an ability to control the landlord’s lawyer’s costs.
In any lease negotiation remember that a saving of $10,000 today is a saving of $100,000 over a ten year period and on a sale of a business the purchase price will reflect profitability and a reduction of costs will have an impact on a sale price.
This post was published in the FMCG Business magazine