Published by the Australian Government Productivity Commission in March 2008, 'The Market for Retail Tenancies in Australia' considers issues that affect both retailers and landlords. However, the results of this publication remain an enigma if you are a small retailer, writes Brandon Conway.
The story of the new tenant
Imagine. You have always had a dream to be your own boss and the idea of retail has had a special appeal. Armed with expertise in business management, customer service, merchandising, accounting and a working knowledge of laws pertaining to leasing, you feel that the time is finally right to lease a shop that has become available in your local shopping centre.
You go though all the text book stages of acquiring a retail shop including developing a strong business plan, investigating the viability of the merchandise you wish to stock and identifying and analysing your target market. Confident, you organise a meeting with the leasing manager. His questions come thick and fast - "Who are you?" "What are your credentials?" "Show me your business plan...your artist's drawing of the store...your bank statements" etc.
As it happens, you have done all your research and are able to answer all his queries. His feedback is extremely positive: "..ideal for tenant mix, will definitely be a hit in the centre". Your head is spinning from anticipation and excitement. When he mentions his design team to help you get up and running at a cost to you of some minor upfront fees, you barely hear him. You are soothed by his guarantees and assurances that management and vendors are a team. When he invites you to accept a lease, you feel that you are well on your way to making your dream of becoming a successful and profitable business owner, a reality.
You have a look at the contract:
Shop size: 70sq meter
Rental: $120,000pa
Outgoings: Approx. 11 per cent
Advertising levy: three per cent
Term: five years
Escalation: five per cent
No exclusivity
No renewal guarantee.
You breathe a sigh of relief. You have a strong idea of the sales you will be able to achieve and based on the above terms, you feel you are assured of a solid profit. Signing your name across the bottom of the contract, you just know that you are on a path to success.
The story of the former tenant
He has just received his lease renewal document with the following terms: a 40 per cent increase in rent plus a new fit out. This will involve:
All this with no income for a month!
The questions swirl around in his head...how can I underwrite these costs? Just to cover the fit out, annual sales will need to increase by $200,000? Will I be able to do that with my existing stock? If not, can I afford to bring in additional lines? Will these new lines sell? Is there enough passing traffic to support these aspirations?
Feeling the anxiety grind in the pit of his stomach, he goes and speaks to other tenants in the area. They all report the same news: 'Times are tough and sales are just steady enough to get by.'
He meets with the leasing manager, deciding on the reasonable approach. After all, the tenants and the centre management are a team. He had said so on numerous occasions himself. "I am sorry I would like to continue my tenancy, but as you are aware, business is slow and we are worried about our ability to finance your rental increase and the new refit."
The reply is unexpected and uncompromising: "We will be sorry to let you go. You were a really good, reliable tenant. But business is business and our head office is really determined to have this precinct looking modern and shiny, and with the strong demand for new shops... your lease will be snapped up.....no problem."
He finds himself pleading. "We have been here for five years and we have a strong local customer presence...if we could just keep our existing lease with the 5% escalation then perhaps by the next lease period, when times are a bit better, we can do the new fit out. What do you say? After all, it would be heartless to make us walk away with nothing after all these years."
The leasing manager, business like and to the point, replies, "I am sorry, Sir. We simply could not allow that. What would the other tenants say if I we did this for you and not for them? It wouldn't be right. We have to look after our shareholders, as I am sure you can appreciate."
The tenant's mind is racing, 'How could this be? It seems like just five short years ago, I was signing the lease, so excited to be opening a shop in the centre. I thought I would be here for the long haul, establishing a business that my children could help me run one day. I felt so sure that I understood the terms of the agreement and was so confident that there was a mutual understanding and that I had the support of the centre...how could I have been so wrong?'
As the leasing manager looks him in the eye, shakes his hand and turns to walk away, they both are thinking the same thing. Rents will always go up, there will always be a queue of hopeful prospective tenants lining up to take shops and the scales are so completely tipped in favour of the shopping centre, that the doors will simply keep revolving.