Please Re-lease Me: Handling lease renewals from a position of strength
We all know to expect death and taxes, but tenants can add one more thing to that list: lease renewals.
A lease begins to expire the day it's signed. Yet, how often have you found yourself scrambling to negotiate a renewal in the last couple of months or weeks before the last day? If you're waiting until the last minute to make the critical decision about renewing, and on what terms, you're clearly not dealing from a position of strength.
What follows are several renewal strategies that will help you deal with your landlord from a position of strength. For the sake of clarity, we'll divide this into two sections: 1) terms and conditions to try to include in your original lease; and, 2) actions to be taken during the term of your lease. However, we cannot stress enough that both strategies must be considered together to form a comprehensive renewal strategy that should be implemented for every lease in your portfolio.
1) Original lease strategies
The terms and conditions you negotiate in your original lease will dramatically affect your renewal. Certainly, concessions are difficult in A centers or malls (malls with $350 in sales per square foot). Still, there are a number of provisions you should try to obtain for the original lease that will greatly improve your bargaining power during renewal negotiations:
a) Option. The option to renew is generally a privilege reserved for the large chains (where the right to remain in the mall is guaranteed in the original lease.) A more realistic option for most retailers is to include a "rents-to-be-negotiated" clause, which means the landlord agrees to negotiate your renewal in good faith. This protects you from being threatened with a move to a mall's dead zone or from unreasonable demands.
An option to renew "at market" rent is another possibility. Scott Moffitt, vice president of franchising and development for Church's Chicken, stresses that: "Retailers and QSR tenants must remember that the landlord owns the property, and is in no way obligated to renew your lease unless there is something in the lease to the contrary." Options are hard to get, but not impossible.
b) Flat rent. The traditional step-up rent, with amounts increasing over the lease term, helps your cash flow when you open a store. However, it can hurt you at renewal time. Take the following example: Assume your rent is $3 per square foot for the first five years, and $10 for the next five years. Your landlord then demands a 20 percent increase at renewal on your final rent ($10). Your starting renewal rent would be $12. Flat rent means you pay one amount for the entire term of the original lease, say $8. The rent is higher up front, which may cause cash flow problems. However, at renewal the 20 percent increase makes the rent only $9.60. You can play with the numbers, but clearly flat rent can pay off in the long term.
c) End of lease date. Everyone (particularly retailers trying to take advantage of Christmas shopping) wants to open a store in November or December. Unfortunately, 10 years later you will be renewing during the height of the Christmas season--hardly the best time to devote precious resources to the task. Why not include a provision that allows you to renew in July or January? The landlord is not put out, and it allows you time to focus on the renewal when business is slower.
d) Holdover. Renewal negotiations are often not completed prior to the actual expiry date, even though the landlord and the tenant want to sign a lease. A holdover clause states that in such cases the current lease stays in effect month to month. Without that clause, the landlord can charge the higher market rent until the new lease is signed.
2) Lease-term strategies
Retailers spend a great deal of time and money assessing new store locations. Once the lease is signed, that same energy is rarely put into the renewal process. This is a serious mistake because you lose a tremendous opportunity to add value to your lease. Below are a few strategies to consider after the new store has opened.
a)Demographics. Once you've signed your original lease, you have the entire term, usually 10 years, to create a database of demographic information about the mall you're in and on the general business area. Now is the time to ask yourself some key questions: Do you want to stay in the mall? Is there a competitive mall nearby that would suit you better? Would a street location be better? In short, do you have all the information you need to make the best possible renewal decision? That information will not appear magically one month before the expiry date. It must be gathered over the course of your lease.
b)Renew in advance. This is a great way to secure a location at a good price during economic downturns. In slower times, landlords will be more willing to give you an extension before the lease expires to ensure you stay in the mall. Steve Hecht, director of leasing and franchising at Canada's Hartco Corp., notes:
"Landlords are all too willing to play hardball when times are good, so retail tenants must be ready to increase their demands when the opposite is true."
c)Multiples. If you have two stores with the same landlord, it is possible to gain benefits for one store while negotiating a renewal for the other. For instance, you might agree to renew a lease in a B mall (approximately $250 in sales per square foot) in exchange for an extension to a lease in an A mall. You may also be able to get the landlord to do certain repairs or complete promised improvements at one of your locations.
d) Assess your bargaining position. Retailers typically overestimate or underestimate their relative bargaining strength at renewal times. If you truly offer uniqueness to a mall--through branding, leasehold improvements, high sales per square foot, or your merchandise mix-- then you may be able to extract concessions. Without at least one of these unique qualities, however, the landlord has the upper hand. The decision to renew is going to happen, so why not plan for it well in advance? You may be able to obtain concessions from your landlord when signing a new lease, but it's not always the best time for deal-making. The renewal process often represents the best opportunity for that. At the very least, you will have been in your store for some time and can make a decision based on your actual performance.
Jeremy D. Behar is the CEO of Cirrus Tenant Lease Services, a franchise consulting firm specializing in lease negotiations and lease administration for multi-unit franchisees. He can be reached at 800-459-3413, or by email at email@example.com.
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