12 Key Terms to Negotiate in Your Retail Lease Besides Rent

Retail leases contain numerous clauses that can be complex and easy to overlook. Understanding and negotiating these 12 key terms is essential for securing a lease that benefits your business and mitigates financial risks.

1. Area

Surprisingly, 50% of leases in NSW don’t specify an area, even though rent and outgoings are calculated on a per-square-metre basis. Ensure you’re not paying for common or unusable areas. The shape of the property also matters; atypical layouts like an L-shape or a poor frontage-to-depth ratio can affect the effective value of the area.

It’s beneficial to get an accurate measurement from a surveyor, ideally using the Gross Lettable Area Retail (GLAR) calculation method, to make sure you’re paying rent based on the actual usable space.

2. Turnover Rent Percentage and Threshold

Turnover rent percentage and threshold determine when you start paying additional rent based on your sales. The Natural Breakeven (NBE) formula is a common approach: Base Rent / Turnover % = Threshold. For example, with a base rent of $100,000 and a turnover rate of 10%, your threshold would be $1 million. If your turnover reaches $1.1 million, this would incur an additional $10,000 in turnover rent.

In negotiations, aim to either lower the turnover rent percentage or increase the threshold to a higher figure, such as $1.5 million, to ensure turnover rent is only payable above a substantial sales level. This strategy gives your business more room for growth before incurring extra rental costs. Benchmark against similar retailers in your category to strengthen your negotiation position.

3. Make Good Obligations

The make-good clause specifies your responsibility to restore the premises when the lease ends. These obligations can be costly, so it’s essential to negotiate them carefully. At the start of the lease, conduct a dilapidation report to document the property’s initial condition. If you’re assuming another tenant’s lease, negotiate that your make-good obligations apply only to the state at takeover, not the original lease’s condition. Discuss with the landlord the possibility of retaining elements of the fitout or work with the landlord in return for not reductions in the make good obligations.

4. Redecoration Clauses

Redecoration should ideally be required no more than once during the lease term. Research market standards and make sure that your redecoration obligations align with typical expectations, preventing any excessive or unnecessary costs.

5. Legal Fees

The Retail Leases Act prohibits landlords from charging tenants for lease preparation and disclosure documents. Confirm that you aren’t being asked to cover any such expenses unlawfully.

6. Operating Expenses

Consider negotiating for a gross or semi-gross lease, where outgoings are included in the rent. Be aware of any outgoings you shouldn’t be paying; for example, Queensland and Victoria legislation prevent landlords from charging tenants for land tax.

7. Promotion/Marketing Levy (Shopping Centres Only)

If you’re leasing in a shopping centre, check what other tenants have paid for promotion or marketing levies, including any initial fees. Understanding these costs will help you negotiate fair terms for your share of promotional expenses.

8. Permissible Use

Ensure the permissible use clause is broad enough to allow for future flexibility, especially if you may want to assign the lease later. Additionally, review whether similar businesses are already operating in the centre, as competing businesses could impact your sales.

9. Incentives

Although other tenants’ specific incentives are often confidential, some leases may include a clause indicating whether incentives were provided. Major landlords also tend to report incentive trends, so research these to understand what you might be able to negotiate.

10. Lease Term

Although five-year leases are typical, shorter or longer terms may better suit your business. Research lease term trends in your industry and location to determine the optimal duration. If possible, negotiate an option period, giving you the right (but not the obligation) to renew the lease upon expiry.

11. Fitout Period

Ensure you have sufficient rent-free time to complete your fitout. A minimum of four weeks is common, but complex fitouts may require more time. Negotiate this timeframe to align with your specific needs to avoid paying rent before your business is ready to operate.

12. Personal Guarantees/Covenants

Personal guarantees can place your personal assets at risk. While some landlords require them, others may be open to negotiation. Research what other tenants in similar circumstances have managed to achieve and assess whether a personal guarantee is necessary or if it can be limited.

Conclusion

Mastering these 12 key terms will empower you in lease negotiations, ensuring you secure a deal that supports your business objectives. Always research current market trends and be thorough in your preparations to strengthen your negotiating position.