15th July, 2018

The keys to negotiating a great retail lease

Negotiating a retail lease with your landlord is a little bit like David battling Goliath, but there are better ways to approach it.

It’s always stressful when you get a letter in the mail advising you that your store lease is up in 12 months’ time. With a bit of planning and a mindset shift, that stress can melt away.

Phillip Chapman, retail lease specialist from Lease 1, says the best outcomes emerge from cultivating a relationship with the landlord.

“Retailers always see it as adversarial,” he told The Pulse. “They should be treating their landlord as one of their key suppliers and the lease as a contract to supply.”

Chapman said leasing costs for the typical retailer could be anywhere between 3 to 12 percent of total sales – so it’s a big mama of a cost.

By getting out in front of the landlord early, you can basically ‘condition’ them.

“Having that ongoing discussion with the landlord on how the business is performing … means you’re constantly conditioning the landlord to that supplier relationship,” said Chapman.

READ: Tips for negotiating with suppliers

“Even though lease legislation may say you can’t negotiate until 12 months out, there’s nothing wrong with conditioning a landlord – that should take place at least 18 months out.”

“At that time, you’re conditioning them before they set their budgets for the next year.”

There are three keys to making sure you’re building a strong relationship with your landlord so retail negotiation is a breeze rather than tortuous.

1. Give yourself time

“There are businesses with multimillion dollar turnover which basically leave the lease in the bottom drawer. Then I get a call to help them out three months from expiry,” said Chapman.

“That’s nuts.”

Chapman said thinking about the lease at about 18 months from expiry can help drive better outcomes for the business.

“The sweet spot is between 18 and 12. After 12, it becomes leverage for the landlord – the pendulum swings very quickly,” he said.

Under the pressure of a deadline, a negotiation’s always going to favour the landlord, Chapman said.

Getting in front of the landlord about your business is one thing. Coming armed with data is quite another.

2. Knowing your numbers (and how they stack up)

Chapman said the key two metrics for negotiating a lease was the occupancy cost ratio and sales per square metre.

The first one is simply finding out what your rent is as a percentage of sales.

The second one is knowing how many sales the business is making per square metre of retail space.

“The majority of retailers are paying too much rent for their fitout, and they’ve usually got too much stock on display,” said Chapman.

WATCH: The importance of store design

With those figures in your head, you can then ask similar businesses to yours about their costs.

For example, if you’re a baker, see if any baker’s association you’re a part of may have benchmark figures to work from. With that data in hand, you can start to have a much more robust chat with your landlord.

For example, if you figure out your occupancy cost ratio is 14 percent, but the industry benchmark is between 10 and 12 percent, tell the landlord.

“What you could say is that if the landlord waived the rent review this year it would allow your sales growth to get occupancy cost back within benchmark,” said Chapman.

“You may not achieve that, but you’re already conditioning the landlord to what it might look like for your affordability at the lease expiry and how the performance of the land is working for your business.”

Chapman also noted that the strongest negotiation position is one where you’re willing to walk away from the table.

3. Have a Plan B and take the emotion out of it

A lease negotiation over a business you’ve poured your heart, sweat and tears into can be an emotional one – and that’s generally not a great negotiation position.

Chapman said, if possible, it’s great to have a Plan B in mind just in case negotiations fall over.

“Having alternatives allows them to step back and be more structured and considered about the outcomes,” said Chapman. “We encourage people to have a backup, an alternative to a negotiated outcome.”

He also said the benefit of thinking about a lease 18 months out is that it removes some of the fear from the negotiation.

“The best thing for retailers to distance themselves in those situations is to do the research and put time on their side, and have a plan – written down,” said Chapman.

“When we advise people to start the process 18 months out, we give them a checklist of things to do. Following those steps helps take the emotion out of it and it becomes more of a business transaction.”