Look before you lease

Posted On Friday, 24 February 2006 02:00 Published by eProp Commercial Property News
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The best approach is to secure advice before signing on the dotted line.

Michael SchirnigQuestion: I've just read your article in Succeed Magazine on tricky lease clauses and realise that I've signed a lease for my shop that has very unfair terms, and the rent is much too high. Can you help me get a better deal?
 
Answer: The minute you've signed the lease, your wiggle room reduces to near 'nil', on the basis that 'the reasonable man' would've applied their mind to the terms and conditions. If you've signed, you've applied your mind, and you're obligated.

Best approach is to secure advice before signing on the dotted line. And if the agreement is indeed that unpalatable, it may be better to leave the premises and trade from elsewhere - I remember securing premises for a retailer in 'unfashionable' Empangeni, which turned out to deliver more net profit at the end of the month than did their Pavilion store. The old mantra of "location, location, location" is still relevant, but must be subservient to "profit, profit, profit" and there are many locations from which to skin the cat, if you apply your mind.
 
My goal here is to give you a crash-course in developing a system that will achieve significant savings from your upcoming lease renewal(s). This can be executed by your in-house property or finance department, or by using the services of an outside expert like Alchemy Corporate Property Advisors. A well-thought-through and consistent programme can result in a very positive impact on your bottom line now and into the future for the term of the lease.

To put together an effective lease option and renewal plan, first give yourself enough time to evaluate the existing terms & conditions of your lease, as they relate to renewal and other options. As a minimum, start evaluating 12-18 months prior to the notice date, and for large users (say, over 2000sqm) begin this process 2-3 years in advance. This lead time is critical in creating a strategy and having time to engage the landlord in negotiations.

Do not negotiate in a void. You will need on-the-ground, up-to-the-minute info, with the goal being to have a detailed understanding of the site and the surrounding market before making that first call to the landlord. Utilise the services of a local broker to provide you with info on rentals, availabilities and trends – if possible don’t use the broker that did the original deal, so as to get at least a bit of independence regarding the data being gathered.

Now, read your lease. A great way to uncover negotiating points and gain some form of leverage with the landlord (in particular around sticking points) is to review expiry conditions, renewal “rights”, reinstatement costs. You may (just maybe!) want to use your upcoming renewal to also debate non-monetary clauses such sub-letting rights, exclusive trading areas and landlord obligations/service levels.

Once you’ve got data on similar buildings in your area and a deep/current understanding of your lease terms, formulate a negotiating strategy for each set of premises, whether it is to renew, extend, refurbish, relocate or reduce in size. Persistence, experience and having the adequate manpower to focus on pursuing these strategies/negotiations then becomes the key to achieving success.

 Should you outsource? You need to asses your staff’s current workload and effectiveness in this area. What I’ve found is that most property and/or finance departments are inadequately staffed relative to the significant commitment necessary to implement a best-in-class programme of lease renewals. As a result, renewals often become last minute compressed negotiations with a much lower success rate. These negotiations are time-intensive and can require 20-30 calls/meetings over a 6 month period in order to achieve maximum results. 
The alternative is to hire an experienced 3rd party that spends time being proactive on your behalf – hiring them can make your programme relatively immune to disruptions and increase chances of success, as the 3rd party typically can allocate the necessary skilled and experienced (at lease negotiation) resources on a just-in-time basis, as and when your firm requires the service. While not yet a major feature of the South African landscape, this type of tenant advocate is common in 1st world markets, where no large property deal is concluded without a tenant’s representative being involved.

In conclusion, look before you lease, and don’t leave so much behind on the negotiating table!
 
Should you need assistance with any property related matters, Alchemy Corporate Property Advisors would be happy to get involved. We look at property from the tenant’s point of view, only representing occupiers of space, not landlords, in a bid to help you make the most of your property dealings.

 

Last modified on Sunday, 25 May 2014 16:18

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