Home / Insights / Avoiding Five Common Retail Leasing Traps Avoiding Five Common Retail Leasing Traps November 6, 2024 - Lease Negotiation Strategies Retail leases come with unique challenges, and small retailers often find themselves facing significant financial risks if these pitfalls aren’t managed correctly. Here are five essential tips to help you avoid the most common traps in retail leasing and protect your business. 1. Not Negotiating on Personal Guarantees For small retailers, a personal guarantee can be a major risk, often representing the difference between severe financial loss—even bankruptcy—and a more manageable outcome, like losing your bond or a limited amount of additional rent. Personal guarantees tie your lease payments to your personal assets, putting you personally on the hook if the business can’t cover rent. Whenever possible, negotiate to limit or remove personal guarantees. Remember, landlords are required to mitigate losses if you leave the premises, and you may be able to negotiate a lease surrender agreement to cap your exposure if an early exit is necessary. 2. Failing to Complete a Dilapidation Report Another common trap is overlooking the importance of documenting the property’s condition at the start of the lease. Without a comprehensive dilapidation report, tenants risk disputes over make-good obligations when returning the premises, often facing costly repairs if the property’s state isn’t well-documented.A building dilapidation report should be completed before moving in, either professionally or independently. A thorough report should include: Date-stamped photos Signatures from both parties Detailed notes on air conditioning, ceilings, walls, floors, sprinklers, and doorways An inventory of any existing fitout A survey and floor plan Provisions for ‘fair wear and tear’ A well-documented report ensures you’re only responsible for the property’s condition at the start of your lease. For lease renewals, your responsibility should align with the property’s state at renewal, not at the lease’s original start date. 3. Not Capping Category 1 Costs Category 1 costs cover essential service alterations, such as power, water, and gas, and they can add up significantly. Retail tenants may be responsible for a portion of these costs, sometimes around 10% of fitout costs.To avoid surprises, negotiate a cap on these expenses during lease discussions. Seek advice from an advisor to set a fair cap, as these costs can quickly escalate. Aim to have the landlord absorb as much of these costs as possible to protect yourself from unforeseen financial burdens. 4. Incentives Are Not Truly “Free” Landlords often provide incentives to cover fitout costs, especially in shopping centres. However, these incentives typically come with strings attached. Instead of a free offer, incentives are often recouped through “fitout rent,” where the landlord gradually recovers the incentive amount over time. It’s essential to carefully assess the capital offered by the landlord and negotiate an appropriate rent that ensures your business’s long-term financial success. 5. Paying Full Rent for Secondary and Tertiary Spaces Retail spaces are often segmented into primary, secondary, and tertiary areas, and each comes with different values. It’s easy to fall into the trap of paying full rent for spaces that offer limited utility. Secondary spaces include areas without direct visibility from the frontage or spaces that are unusually deep. For example, in a shop with a 5-metre frontage, anything beyond 15 metres in depth may be better used for storage. Tertiary spaces include areas with restricted visibility or accessibility, such as space under stairs, behind columns, or areas with low ceiling heights. When negotiating, compare similar secondary and tertiary spaces in other shopping centres to determine fair pricing, ensuring you’re not paying full rates for less desirable areas. LeaseInfo Instant access to verified retail leasing data Information Services · Summer Hill, New South Wales