Retail Commercial Leases: It pays to get them right! By @SA_RetailGuru #IndieRetail

The two certainties in life are death and taxes and the High Street is no exception to this rule, as the spate of retailer fatalities this week has demonstrated.  One of the major reasons for this is the high cost of renting property on the High Street and it is no coincidence that rent quarter days see a higher proportion of insolvencies.

Retailers really need to go through their lease documents with a fine-tooth comb!

Whilst a few years ago, retail tenants may have given scant thought to the finer wording of a lease in their haste to secure a prime location, the world has changed and such short term views cannot now be taken.  So what should a tenant look at when negotiating a lease to its advantage?

Term

It cannot be stated strongly enough that unless a favourable break clause can be negotiated, a short term is a favourable option to a tenant.  If trading conditions change, the tenant can review its position and take a view on whether to renegotiate the rent on lease expiry or simply pull out of the premises.  Without this flexibility, a tenant could find itself burdened with overheads on an unwanted property for many years, whilst having to pay business rates and be responsible for maintenance also.  The increasing number of voids on the High Street and the abolition of empty business rates relief have put landlords under pressure to fill units, which a tenant can use to its advantage during negotiations.

Break clauses

This goes hand in hand with term, really.  If a longer term is agreed, it is certainly worth inserting at least one break option, so that the lease can be terminated by the tenant if so desired.  Often break clauses are worded so as to make them validly operated only if certain conditions are met by the tenant, these may range from payment of rent to the handing over of original deeds to the landlord.  A break clause should ideally be unconditional: this will reduce the margin for error.  Care should be taken when drafting and serving the break notice, as the lease will often set out rules governing the means of service, the deemed service provisions and the party to whom the break notice must be addressed.  Even an unconditional break option therefore carries its pitfalls and it is worth taking expert advice prior to serving a notice, as the financial consequences of serving an invalid break notice far outweigh the cost of such advice.

Alienation and concessions

Leases often provide that a tenant may only part with possession of the whole of the premises, whether by assignment or subletting.  In the current climate, many tenants find that they no longer need all of their space and could operate a more profitable operation if they could dispose of part of their demise.  It is therefore useful to negotiate that ability into a lease, which can allow a retailer to sublet so as to bring in complimentary neighbour, paying rent and potentially attracting additional footfall, or to assign part of the demise to a non-competitor, significantly reducing overheads.  The ability to allow concessions into stores is also desirable, as they can again be mutually beneficial.

Service charge

The service charge provisions in a lease can add a significant sum to a tenant’s outgoings, so steps should be taken do minimise these if possible.  It is useful to impose a service charge cap, limiting the amount that a landlord can charge in a given year.  In the case of shopping centres, does the tenant have its own marketing campaign?  If so, it should try to avoid contributing towards the any marketing costs that the landlord may incur in promoting the centre.  Are certain tenants more likely to cause wear and tear than others?  Again, factor this in.  Ensure that the landlord justifies its expenditure.

Repair

Dilapidations are often a huge source of contention between a landlord and tenant.  A good option is to insert into a lease a schedule of condition, documenting the state of the premises at the start of the lease and limiting the tenant to bringing it back up to that standard.  Otherwise, a tenant may find its landlord seeking what is in essence an improvement of the premises, at the tenant’s expense.  Tenants should also be wary of landlords serving an interim schedule of dilapidations, as in many cases, these can be challenged.  It is always worth undertaking a survey prior to lease expiry and liaising with the landlord to ensure that any items of dilapidation are remedied before the premises is handed back, so as to minimise any claim.

Rent review provisions

Most leases provide that rent can go up on review, but not down.  In recent years, that has put established tenants at a huge disadvantage as compared to new tenants coming into the market, as open market rents have gone down.  When negotiating a lease, a tenant should try to ensure that the rent can be reviewed in either direction.  Whilst on renewal a lease generally follows the existing lease, if a tenant can show that rent may go down as well as up, it may be able to challenge the upwards-only nature of the existing rent review clause.

Final thoughts: A lease is a huge investment…

A lease is a huge investment for a tenant – it pays to get it right.  The list above is not exhaustive but should hopefully give tenants a steer in the right direction.  If in doubt on any aspects of a lease, seek specialist advice.  A solicitor will be able to assist and in certain circumstances a chartered surveyor should also be instructed.  With the correct advice, a tenant can avoid being tied into an onerous lease and reduce the likelihood of it becoming the latest High Street casualty.

This blog was written by David Linklater is a property litigator at SA Law LLP in Hertfordshire who specialises in the retail sector. His expertise covers all aspects of commercial property litigation, acting for tenants, landlords, investors and developers. David advises on a whole range of commercial property scenarios, including business lease renewals and termination, dilapidations disputes, advice on forfeiture, the property insolvency regime and restructuring advice, rent reviews, advice concerning the acquisition of land and buildings and the rights pertaining thereto, actions against trespassers and telecommunications advice.

Established in 2005, SA Law is a market-leading law firm. Operating fromSt Albans in Hertfordshire, it provides businesses and individuals with expert advice and representation.

If you would like more information or advice relating to a specific matter, please do not hesitate to contact me on 01727 798097 or by email at david.linklater@salaw.com. Follow me on Twitter @SA_RetailGuru or connect with me on LinkedIn at http://www.linkedin.com/in/davidjlinklater .

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About Clare Bailey

Clare Bailey, The Retail Champion (formerly Clare Rayner), is one of the most well-known and respected retail experts in the UK. With unrivalled knowledge in retail, high streets and consumer matters, she offers unbiased, independent content – whether engaged as a professional speaker, for broadcast media, or for a written feature. Clare is a business woman, entrepreneur and founder of several small businesses. Having been born into a family of successful business owners, it was inevitable that she’d eventually jump off the corporate treadmill and step out on her own! Today her brand portfolio includes The Retail Champion, The Retail Conference, the Future High Street Summit and the Support for Independent Retail campaign. In addition, she is co-founder of Mobaro Retail UK and a non-exec director of Beed Virtual Assistant Services. Having started her career as a fast-track store management trainee for McDonalds, she went on to work with leading retailers such as M&S, Dixons and Argos. She moved swiftly into management roles before being headhunted into senior consulting roles with global software giant SAP, and international management consulting brand, Accenture. Her corporate background in senior retail, consulting and technology roles, coupled with her experience of creating and running her own business, has enabled her to be equally capable whether consulting to global brands or micro businesses. This unique blend has not only positioned her as a leading expert in all things retail, but has enabled her to add meaningful commentary and insight to the debate around the future of the high street, and, how technology is driving fundamental change in the way consumers, and businesses, interact. Clare has become an influential voice in her field, which has resulted in her becoming a regular media contributor and sought-after conference speaker. Often seen on Good Morning Britain, BBC Breakfast, Sky News, and Chanel 5 (to name a few), Clare speaks on a myriad of retail, high street and consumer issues – but is particular adept when it comes to explaining the context behind retail trading results, newly released data, and government stats, in a palatable and informative manner. In addition to broadcast and conference speaking, Clare is the proud author of two best-selling business books published by Kogan Page - The Retail Champion: 10 Steps to Retail Success, published July 2012 and How to Sell to Retail: The Secrets of Getting Your Product to Market, published February 2013. She has provided contributions to various academic texts, including Retail Marketing Management (published by Pearson). With an engaging, conversational yet informative style, Clare writes for press and content agencies, providing features, articles, blogs and opinion pieces as well as contributions to white papers and reports. However, when the situation demands a more serious style, Clare can deliver - In 2016 she wrote an extensive report for a major insurance and risk law firm, as a retail expert witness, to support a public liability suit. She found that project particularly enjoyable as it played well to her strengths – assimilating large amounts of data and information, identifying the key points and articulating that in an understandable manner. When not on TV or speaking at conferences, Clare’s “day job” sees her supporting consumer-facing businesses through her consultancy services. When asked to describe what she most loves about retail consulting it is typically the opportunity to “dig deep”, getting “under the bonnet”, in order to leverage the business data to uncover the insights that lead to “lightbulb moments”. She also loves working on business change programmes that centre on improving the processes and systems to increase profitability by supporting more rapid, better informed decision making, improving the customer experience, or simply by become more efficient and streamlined. In this respect she considers herself a “business engineer” with a brain that works like a relational database! Due to her years of experience, her logical, objective approach, her quick, rational thinking, she is known for being able to cut through complexity, seeing right through to the crux of issues, finding creative solutions that others may have overlooked. As if all that wasn’t enough, Clare is a working mum, juggling a home life in rural Lincolnshire with her partner, their 5 kids, 4 cats, and geriatric Labrador! For all enquiries, contact Clare directly on 01727 238890 or email champion@retailchampion.co.uk.
This entry was posted in Blog-a-day for Indie Retail, Independent Retailer Month 2011 and tagged , , , . Bookmark the permalink.

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