Lease1 Retail Lease FAQs

Retailers should start reviewing their lease position well before the formal expiry or option exercise date.

As a general rule, Lease1 recommends beginning the review process around 18 to 24 months before a critical lease event, particularly where the lease contains an option to renew. This gives the Retailer sufficient time to understand the market, review the performance of the location, assess alternative premises and develop a negotiation strategy before becoming constrained by contractual deadlines.

One of the most common mistakes Retailers make is waiting until an option notice is due before thinking about their next lease term. By then, much of the negotiating leverage may have already disappeared.

The first step is to identify all critical dates, including the lease expiry, option exercise window, market rent review dates and any notice periods contained in the lease.

Retailers should then consider whether remaining at the premises continues to support the future of the business.

At Lease1, we encourage Retailers to remember that you lease time, not just space. The amount of secure lease tenure remaining can directly affect business value, finance, succession planning and the ability to sell the business.

An option to renew can be extremely valuable, but exercising it should not be automatic.

An option generally gives the Retailer a contractual right to continue occupying the premises for another term, provided all of the conditions of the option are satisfied.

However, exercising an option may also mean accepting existing lease conditions that are no longer appropriate for the business.

Before exercising an option, Retailers should review the rent, rent review structure, outgoings, security requirements, make-good obligations, permitted use, relocation or demolition provisions and any other terms that may affect the business during the next lease period.

There may also be circumstances where negotiating a new lease provides an opportunity to seek improved commercial terms.

The key is to understand the difference between protecting the existing contractual right created by an option and negotiating commercially with the Landlord.

Retailers should never allow an option exercise date to expire simply because negotiations are continuing unless they have obtained appropriate advice about the consequences.

Every lease and every Australian jurisdiction can operate differently, so the lease documents and applicable retail leasing legislation should always be checked.

The rent stated in your lease should never be considered in isolation.

To understand whether a rent is commercially sustainable, Retailers should consider the total occupancy cost of the premises. This may include base rent, outgoings, marketing contributions and other property-related charges.

Lease1 commonly considers factors such as:

• rent per square metre;
• comparable leasing evidence;
• location and centre performance;
• size and configuration of the premises;
• incentives being offered in the market;
• rent review structure;
• outgoings;
• turnover or business performance where relevant; and
• total occupancy cost as a percentage of business revenue.

Retailers should also distinguish between the face rent shown in a lease and the effective commercial rent after incentives or other concessions are taken into account.

A high rent does not automatically mean the lease is unsustainable, just as a low rent does not necessarily mean the lease represents good value.

The more important question is whether the overall lease structure supports the profitability, sustainability and future value of the Retailer’s business.

Potentially, yes.

A lease is a binding contract, so a Landlord is generally not required simply to reduce the rent because a Retailer requests it. However, there are many circumstances where a commercial renegotiation may be possible.

These can include changes in market rents, declining centre performance, prolonged vacancies, major disruption, redevelopment, changes in customer traffic or circumstances where the Retailer is considering relocation or closure.

The Retailer’s negotiating position is usually strongest when the request is supported by evidence rather than simply stating that the rent is too high.

A well-prepared proposal might include market rental information, occupancy-cost analysis, business performance information and evidence of comparable premises.

Retailers should also consider the wider commercial relationship. A Landlord may be willing to provide a temporary rebate, rent restructuring, incentive, lease extension or another concession where doing so helps retain a strong tenant.

Successful lease negotiations are rarely about simply asking for a discount. They are about presenting a commercial case that creates value for both parties.

Most retail leases contain a mechanism allowing the rent to change during the lease term.

Common rent review methods include:

• fixed percentage increases;
• Consumer Price Index or CPI increases;
• market rent reviews; and
• combinations of these methods.

The lease should identify when each review occurs and how the new rent is calculated.

Retailers should check every rent increase against the lease rather than assuming the Landlord’s calculation is correct.

Market rent reviews require particular attention because they involve assessing what the premises would reasonably rent for in the relevant market at that time, subject to the requirements of the lease and applicable legislation.

Retail leasing legislation differs between Australian states and territories and may impose rules around market rent reviews, dispute processes and the appointment of specialist valuers.

Where a Retailer believes a proposed market rent is excessive, it is important to act promptly because statutory and contractual timeframes may apply.

Every rent review should therefore be treated as a lease management event rather than simply another invoice.

Outgoings are one of the most commonly misunderstood areas of retail leasing.

Depending on the lease and applicable legislation, a Retailer may be required to contribute towards certain operating expenses associated with the building or shopping centre.

These could include items such as council rates, insurance, cleaning, security, common-area expenses and centre operating costs.

However, not every Landlord expense can necessarily be passed on to a Retailer.

The recoverability of an outgoing will depend on the wording of the lease and the retail leasing legislation that applies in the relevant state or territory.

Retailers should carefully review:

• the annual outgoing estimate;
• previous-year reconciliations;
• significant increases;
• new categories of expenditure;
• management or administration charges;
• capital expenditure; and
• expenditure that may be excluded by legislation or the lease.

Retailers should not treat outgoing statements simply as bills to be paid.

They form an important part of the total occupancy cost of the premises and should be monitored throughout the lease.

If a business operates from leased premises, the lease will usually be an important part of the sale.

In many cases, the purchaser will need the existing lease transferred or assigned to them. This generally requires the involvement and consent of the Landlord in accordance with the lease and applicable legislation.

The assignment process may involve providing information about the purchaser’s financial position, business experience and proposed use of the premises.

There may also be disclosure documents, guarantees, legal documentation and other requirements that need to be completed.

Retailers considering selling their business should review their lease well before placing the business on the market.

A business with insufficient lease tenure remaining can be more difficult to sell or finance.

This is why Lease1 encourages Retailers to consider their lease as part of their broader business succession plan.

Ideally, the lease should provide sufficient remaining tenure to give a purchaser confidence that they can operate the business long enough to justify their investment.

Your lease can therefore become either an asset supporting the sale of your business or an anchor restricting its value.

A Retailer cannot generally simply walk away from a lease without potential financial consequences.

However, there may be several possible exit strategies depending upon the circumstances.

These can include:

• assigning the lease to another operator;
• selling the business and transferring the lease;
• negotiating a surrender with the Landlord;
• relocating within a shopping centre;
• negotiating an early termination arrangement; or
• relying upon a specific right contained in the lease or available under applicable legislation.

The financial consequences of an early exit can vary significantly.

A Landlord may seek payment of outstanding rent, incentives, legal costs, make-good costs or other amounts, depending upon the lease and circumstances.

This is why Retailers should develop an exit strategy before approaching the Landlord.

A negotiated surrender can often produce a better outcome when the Retailer understands the Landlord’s commercial position and presents a practical solution.

The earlier the issue is addressed, the more options are generally available.

There is no single lease term that suits every business.

However, one principle applies across almost every retail business: the amount of secure lease tenure remaining can materially influence business value.

A purchaser, lender or investor wants confidence that the business has the right to continue operating from its location for a reasonable period.

For example, a profitable business with only a short period remaining on its lease and no further option may face uncertainty about whether it can remain in the premises.

This can affect finance, valuation and the willingness of a purchaser to acquire the business.

Retailers should therefore align their lease strategy with their broader business plan.

Questions to consider include:

• When might I want to sell?
• How long do I intend to operate the business?
• Will a purchaser require additional lease tenure?
• Do I have sufficient options?
• What happens when the current lease expires?

This is the basis of Lease1’s philosophy that Retailers lease time, not space.

The premises may be important, but it is the contractual right to occupy those premises into the future that can provide real value.

The end of a retail lease can create significant obligations for a Retailer.

Most leases contain provisions dealing with the condition in which the premises must be returned to the Landlord.

These are commonly referred to as make-good or reinstatement obligations.

Depending upon the lease, the Retailer may be required to remove fixtures, signage or fitout, repair damage, repaint areas or return the premises to a particular condition.

These obligations can sometimes involve substantial costs.

Retailers should therefore review their make-good obligations well before the lease expires rather than waiting until the final weeks of occupation.

The process should also include confirming:

• the final rent and outgoings;
• outstanding repairs;
• removal of equipment and signage;
• handover requirements;
• return of keys;
• release of guarantees; and
• return or cancellation of any bank guarantee or security deposit.

A structured lease-exit plan can significantly reduce disputes and unexpected costs.

The first step is to understand exactly what the lease says and to document the issue clearly.

Retail lease disputes commonly involve rent, outgoings, repairs, maintenance, access, redevelopment, relocation, make-good obligations, lease renewals or interpretation of lease clauses.

Retailers should keep written records of relevant discussions, notices, invoices and correspondence.

Where possible, the issue should first be approached commercially.

Many disputes can be resolved through clear communication and negotiation before formal legal processes become necessary.

However, Retailers should also be aware that retail leasing legislation in each Australian jurisdiction may provide specific dispute-resolution procedures.

These can include mediation, tribunals or other statutory processes.

Time limits may also apply.

Lease1’s approach is to help the Retailer first understand their commercial and contractual position, identify the desired outcome and then develop a structured negotiation strategy.

The goal should always be to resolve the issue efficiently while protecting the Retailer’s ongoing business.

The biggest mistake is treating the lease as a document that gets signed and then forgotten until it is about to expire.

A retail lease should be actively managed throughout its entire term.

Some of the most common mistakes Lease1 sees include:

• missing option exercise dates;
• starting negotiations too late;
• automatically exercising an option without reviewing alternatives;
• failing to check rent increases;
• failing to review outgoing reconciliations;
• accepting lease amendments without understanding their impact;
• failing to negotiate incentives;
• overlooking make-good obligations;
• providing unnecessarily high security;
• failing to plan for the sale of the business; and
• not maintaining sufficient lease tenure to protect business value.

A Retailer’s lease will often be one of the largest and longest financial commitments made by the business.

It should therefore be managed with the same attention given to staffing, finance, stock, sales and profitability.

At Lease1, our objective is simple:

Help Retailers manage their lease like a business asset — not discover too late that it has become an anchor.