7 Tips to Help You Negotiate a Better Retail Lease Deal

Lease negotiations can be complex, with numerous terms and conditions to consider. However, understanding key elements of a lease can help you secure a better deal. Here are seven essential tips to guide you through the process.

1. Exercise Your Options Correctly

An option clause allows you to extend your lease for another term at the end of the initial period. Missing the window for exercising this option usually means forfeiting your right to renew. It’s crucial to follow the instructions in your lease precisely, especially when it states “time is of the essence,” meaning even a small delay could cost you the option.

To exercise your option correctly, ensure that your written notice includes the date, the lessor’s details, clear identification of the premises, and an unconditional statement of your intent to renew. Also, be sure to deliver it within the specified timeframe and keep proof of delivery to safeguard your renewal rights.

2. Look Beyond the Base Rent

While base rent is important, it’s easy to overlook additional costs that can increase your total occupancy expenses. These may include outgoings, marketing levies, and licenses, which can contribute up to 25% of your overall costs. Another hidden cost to consider is the turnover rent percentage, which is the extra rent paid when sales exceed a certain threshold. The lower this percentage, the better, as it can add up quickly if your store performs well.

3. Understand Your Make Good Obligations

Make good clauses set out the tenant’s responsibility to return the premises to its original condition at the end of the lease, allowing for fair wear and tear. These obligations can be expensive, ranging from a few thousand dollars to substantial amounts, depending on the property. Always complete a dilapidation report at the start of the lease, and ensure that if you’re taking over someone else’s lease, you’re only required to return the property to its condition when you took possession.

4. Know Your Market Rent Review Rights

Under the Retail Leases Act, tenants have the right to an early determination of market rent. For example, Section 32 of the NSW Retail Leases Act allows tenants to request an early market rent determination when exercising an option for lease renewal, giving them the opportunity to review the market rate before committing to the renewal.

For specialised retail uses, such as liquor stores, pharmacies, newsagents, and post offices, the appointed valuer must have primary regard to comparable properties used for the same or similar purposes when determining the market rent. This ensures that the rent is reflective of the specific use of the premises rather than a general retail rate.

5. Negotiate Incentives Carefully

Incentives, such as fitout contributions or rent-free periods, are a critical part of retail leasing. While large shopping centres often offer incentives, keep in mind that the lessor will likely adjust the base rent to compensate. The larger the incentive, the higher your rent (and potentially higher future increases).

Incentives should cover Category 1 costs, which refer to essential landlord-controlled expenses like base building works (plumbing, electrical, fire systems). Fitout costs that are tenant-specific, such as furniture, fixtures, and equipment (FF&E), should not form part of the incentive. The best deals balance the cost of financing the fitout against any extra rent the lessor may charge. In some cases, a longer rent-free period may offer better value without affecting rent levels.

6. Understand Rent Reviews

Rent reviews can significantly impact your overall rent during the lease term. On a typical five-year lease in a shopping centre, the type of rent review applied can result in much higher rents. For example, in a high-inflation environment, CPI-linked rent reviews led to rent increases of up to 8% per annum in 2022.

If your lease falls under the Retail Leases Act, you cannot change the CPI increase, but it’s often preferable to negotiate fixed rent reviews, as they provide certainty. If the lease is outside the Retail Leases Act, try to negotiate a cap on CPI-linked increases to protect against high inflation.

7. Adjust Rent for Atypical Property Shapes and Sizes

If you’re leasing an irregularly shaped property, rent adjustments may be necessary. For example, in L-shaped stores, the front is usually valued based on comparables, while the back or “tail” may be priced at a lower rate. Properties with poor frontage-to-depth ratios (long and narrow) may require rent divisions between primary and secondary areas to ensure fair pricing.

By following these seven tips, you’ll enter lease negotiations with greater confidence and awareness, positioning yourself to secure the best possible deal.