The best way to negotiate a lease in a major shopping centre
Major shopping centres looked appealing for years. All that foot traffic. The bright and shiny look. Being there was appealing.
The Covid hit, and traffic to major centres crashed. It’s coming back, but it’s not where it used to be.
With good space availability, leasing execs are doing the rounds, seeking to fill spaces. In some cases they are cutting deals, while in others the occupancy cost is as high as ever.
My advice to anyone negotiating for space ion a major shopping centre is: negotiate as if you have a better deal elsewhere. Don’t rely on it. Don’t visualise that centre as the only location for you. Have a viable plan ‘B’ and even a plan ‘C’. And, only agree to what you are 100% happy with.
Too often I see retailers agree to leases because of the appeal of bright shiny lights and what appears to be good foot traffic, one;y to rue the decisions for years.
By having viable and appealing options you allow yourself to have a more circumspect off the major centre leasing exec pitchy and that works in your favour.
I know there are people in our channel who say they get the best deals. It’s one think to claim this and another entirely to prove it. Ask for the evidence. In one situation I heard about recently when the retailer asked for evidence of deals a party claimed they had achieved the response was oh, privacy. That’s a crock in my view. If you claim you can get an awesome deal, prove it … otherwise, it remains marketing spin not backed by evidence.
You’re in your lease situation for 5 years at least usually. That’s a long time to be locked into something which with you are dissatisfied or unhappy. It is why you need to research carefully, to be sure you will be happy. It’s why you need to have options so you can compare before you sign anything.
One tip for those considering a shopping centre situation, have a plan ‘B’ option that is outside the centre and it is this different situation comparison that could be particularly helpful in landing at a decision. The two settings are physically and location different, they are usually financially different, too. This is what it is good for you to have the option with which you can compare. I have done this myself and pivoted to outside of shopping centre retail – less stress, lower occupancy cost and higher profit from sales = better business value.
This ABC story about Pearcedale Hardware is a must-read story for all small business retailers and every Australian who cares about or relies on small business retail
Pearcedale Hardware is closing today and the ABC has published a deep-dive into why:
The cost of doing business
By Jessica Longbottom and Eden HynninenPublished
For many residents in the quiet township of Pearcedale, the local shops are the heart of the community.
On this weekday, the complex an hour’s drive south-east of Melbourne is beating strong.
Shoppers exchange cheerios across the car park and small talk about the impending rain as they bustle, car keys in hand, between the 13 shops.
…
The shop was their retirement plan. They hoped to rebrand it and work towards selling it, believing they could get a few hundred thousand dollars.
But they say things began to look shaky when their lease lapsed in 2019, and the owners wouldn’t sign a new agreement with them.
They were on a month-by-month arrangement, when in May this year their property agent emailed them a new leasing agreement.
“[I was in] disbelief. I couldn’t believe what they were asking,” Adrian says.
The landowners were tripling the rent — from $29,687 a year to $88,638 a year.
Be sure to read the whole story.
There are many good landlords out there who go above and beyond for their small business tenants. There are also plenty of landlords who suck.
This story is a reminder that we small business retailers sign our leases, accepting the terms and conditions, accepting the risk.
When a lease goes to month-to-month, that’s what it is. We need to manage our business with that expectation and do our own planning, rather than relying on a decision from the landlord.
I appreciate it can be difficult and challenging. But, it’s best we expect the worst and plan for it, to protect ourselves and our business as much as we can … because, too many landlords do suck.
Retail is fundamentally changing in ways we can see and, more importantly, in ways we cannot see. We have to be as far ahead of that curve of change as we can be. This means disrupting your own businesses. Running a shop with one prime source of income (the shop) is an out of date model. we seen to diversify as to what people buy, how they buy and the locations they buy from in the retail world today. This approach spreads the risk.
Back in the day, opening the front door of your local shop was the key marketing activity. Not now. Not for many years.
I have been in the situation of the folks at Pearcedale Hardware, facing a massive rent hike. I said no thanks. I am lucky to have a diverse business such that closing one shop would not hurt too much. But … I evolved the business to be that, to not rely on one location.
I appreciate many local small business retailers don’t feel they can do that due to capital, local situation or other factors. But, there are ways to insulate your business from the impact of a massive rent hike. The time to seek those ways out is long before you need to … and that is the core point I’d make today.
US landlords claiming online sales as in-store revenue for rent calculation
The Wall Street Journal is reporting that some US landlords are demanding retailers report online sales as part of store revenue.
Retailers and Landlords Clash Over What Counts as a Sale
Rents based on percentage of sales leave room for interpretation as line between online and store sales blursStores are reopening and customers are streaming back in, which means retailers that withheld rent during Covid-19 shutdowns are now able to pay. But first they have to agree with their landlords on how to define a sale.
Landlords are increasingly offering deals in which retailers pay a percentage of their monthly sales in rent, rather than a fixed amount. Percentage-rent leases give retailers breathing room when sales decline and allow landlords to reap the upside when sales recover.
But there is a sticking point. With e-commerce soaring, some landlords want to include a portion of online sales in the new leases, arguing that physical stores play an important role in many of these transactions. Retailers are pushing back, according to landlords, real-estate brokers and retail executives.
If this does happen it will only lead to more retailers exit9ing shopping malls. Malls are struggling as it is to attract retailers because shoppers are remaining sticky with high street retail they engaged with during lockdowns.
But, hey, we know what major shopping centre landlords are like. Yeah … awful. Look at Westfield, long into a lease they decide to charge a fee to access the post box located in a non public area of the centre that you have had free access to for years. And they wonder why retailers are exiting.
There are signs major landlords are scrambling to appeal to newsagents
Newsagents in two different large capital city shopping centres received revised offers from their respective landlords last week to entice them to stay in the centre.
In each case their lease was ending and the newsagents had advised they would not continue because of the high occupancy cost.
\For months the respective landlords said there was no room to move and then, at the last minute, they blocked and offered a substantially discounted offer.
What makes these cases different is that the discounted offer is a discount on base rent, not some manipulated pitch that enables the landlord to claim higher value for the space than what is actually paid.
If what I’m told Wass pitched last week is a trend, it would be good news for newsagents in shopping centres.
Rent relief extended for retailers in Victoria
Newsagents in Victoria need to know that the Covid rent relief measures put in place through the national cabinet earlier this year have been extended.
Click here to access the details of this scheme.
As has been the case since March this year, independent landlords are more likely to be on top of this and providing relief, often beyond what is required, without many barriers. It is the big business landlords, the major shopping centre landlord businesses, that are problematic, late and providing considerable stress for small business retailers.
While the extension of arrangements by the Victorian government are welcome, it would have been helpful for there to be penalties for landlords who stalled the process.
Westfield locks out some retail tenants
The Nine papers late Thursday night reported actions by Westfield against some major tenants over unpaid rent.
Westfield shopping mall owner Scentre has begun locking non-rent-paying retailers out of their stores in a dramatic escalation of tensions between major landlords and their retail tenants.
ASX-listed retailer Mosaic Group, which operates stores such as Noni B, Rivers and Katies, told investors on Thursday afternoon 129 of its stores in Westfield nationally had been “temporarily closed by the landlord Scentre Group”.
…
Scentre’s approach is the newest escalation of tensions between landlords and major retail tenants over rental amounts paid during coronavirus lockdowns, where many stores were shut or receiving significantly reduced income due to social distancing measures.
Mosaic, along with other retailers such as Solomon Lew’s Premier Investments, have either refused to pay rent or paid a reduced level of rent to their landlords during the period, saying that proprietors should share the burden of the economic crunch brought on by COVID-19.
The ABC published a story about this yesterday.
I was surprised months ago to read that several major shopping centre tenants had stopped maying rent. I have shops in 2 Westfield centres and have kept paying, albeit at a reduced amount and with transparency to Westfield, as I knew at some point, once the national code discounts are applied, there’d be a call what is owing.
While I am interested in any pressure on landlords on rent overall, deliberately not paying rent is not a good negotiating tactic in my view. It will be interesting to see where this story plays out.
COSBOA: The big landlord problem is now obvious for all to see – small businesses need intervention
The Council of Small Business Organisations of Australia, of which ALNA is an active member, is lobbying on behalf of small business retailers. Here is their complete release on this, a release that draws on an earlier release from ALNA:
The big landlord problem is now obvious for all to see – small businesses need intervention
COSBOA calls upon the biggest landlords in Australia to set an example of responsible behaviour in a time of crisis, and to start acting in good faith with the proposed Mandatory Commercial Tenancy Code (“the Code”). Some landlords are doing the right thing, but many, including the largest ones, are still unwilling to share the financial impact of social distancing.
Peter Strong, CEO of COSBOA, stated “The COVID-19 issues for small business are many, as they are for everyone. We recognise that thanks to strong leadership, federal and state/territory governments have flattened the COVID-19 curve. A consequence of this, however, has been an extraordinary drop in our retail foot traffic. This is not the fault of tenants or their landlords, but one of the most pressing issues is getting landlords to engage genuinely and effectively with their small business tenants to fairly relieve their rent burden when they have few or no customers. As we work hard on the other big issue, employment, through the JobKeeper program, we have to also deal with the immediate challenge around rent and retail leasing. A business cannot use JobKeeper if it is bankrupted, or will be, by a landlord.”
COSBOA sees the best solution now is for the states to legislate that all retail tenants who are eligible under The Code and who are the most vulnerable, like businesses with less than $2 million turnover, have an immediate three-month waiver for April to June on rent, with support from government to share this cost with landlords.
This will clear the decks with immediate support and we won’t lose businesses unnecessarily. It can be followed by good faith negotiations under the code. Mediation can occur if it is required, as is the intent of the Code.
Mr Strong added “the fact is that payment of rent is not possible for a large proportion of small businesses in malls and the current behaviour of the landlords will create tens of thousands of bankrupt businesses. The development of the JobKeeper program would be meaningless if a business was bankrupt and the owner of the business was in deep despair. However, landlords overwhelmingly seem to fail to understand we are in a crisis.”
COSBOA understands this is not a federal issue as the states are responsible for legislating the leasing regulations required for the proposed Code now.
Mr Strong also added “we see the West Australian Government have led the way with yesterday’s announcement of $100 million in land tax relief grants available for commercial landlords who waive rent for 3-months for small business tenants who have suffered a 30 per cent drop in turnover due to the impact of COVID-19.
Where the federal government can help is to bring forward changes to sensibly increase the thresholds for Unfair Contract Terms (UCT). This will provide fairness for small business tenants from aggressive contracts and leases. It must be acknowledged that the Prime Minister and the Treasurer have confronted this problem, and they have probably discovered what we in small business have known for decades: that the biggest landlords are not the most constructive, contributing members of our society.”
Many businesses need outcomes now or at least in the next few weeks, not the next few months. Unfortunately, we do not see this happening. There is also the recent intervention of the ACCC which has given many landlords the ability to share information about their tenants. This has provided those landlords the opportunity to legally connive and then take similar ‘actions’ with tenants. These landlords appear to be using the authorisation and The Code (even though it is not legislated yet) to co-ordinate and provide a protective mechanism for themselves while complicating and deferring outcomes for tenants.
Some of these landlords are asking for extensive information from tenants far in excess of what is required under The Code. This includes in many cases requests for P&Ls and balance sheets, not just disclosure of revenue impacts. They are also asking the retailer to demonstrate they have used all state and federal small business support packages first as well as bank assistance before they will consider any request. The landlords are creating significant additional and needless expenses for their tenants. These requests are time consuming, delay outcomes and require information which they really have no right to require (other than revenue impacts), and are not consistent with The Code or acting in good faith.
Mr Strong further added, “Bizarrely, some of the biggest landlords are asking tenants to predict their turnover for the next twelve months. This shows the landlords are not capable of forward planning yet expect small business people to do that planning for them. The federal government has deferred its own budget until November as it knows it cannot yet predict the future with any certainty, but the landlords expect small business people, under extreme personal stress, to produce a plan for the next twelve months. It is obvious that the authorisation landlords have been given by the ACCC should now be rescinded, and they must stop opportunistically asking for information that they do not need and that may harm these tenants in the long run.”
Note: The business folk and the employees who will be affected come from cafes, restaurants, newsagents, shoe stores, clothing shops, lottery agents and hairdressers among others and they need government help and good faith from their landlords to address this.
A retail tenancy win for small business in WA
Great news out of WA tonight with the state government announcing 3 months rent free for SMEs that have experiences a 30% decline in turnover. It is backdated to start from March 1, 2020. The government is providing landlords terrific financial support if they waive rent for 3 months for SMEs. The landlords have an excellent incentive because of this.
This is an excellent result from the WA government, a government that continues to deliver terrific results for small business retailers.
NOTE: the 3 months rent free is exactly what ALNA and all the newsagency marketing groups have been agitating for and suggested members write to politicians about.
Landlords demand secrecy from SME tenants as they continue to push back on the MANDATORY CODE OF CONDUCT SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19
Small business retailers can’t take a break in dealing with landlords over the collapse of retail traffic in shopping centres. Yesterday, several retailers told me that in addition to demands for extraordinary business and personal financial data, the landlords are demanding a signed confidentiality agreement.
Two requests I have seen make it clear that a signed confidentiality agreement is required before any discussions can proceed. This is despite existing leases covering confidentiality requirements.
It makes no sense that landlords are demanding more paperwork when they have a lease in place covering these requirements.
Every day this drags on is a day closer to small retail businesses going to the wall.
The behaviour of many shopping centre landlords in Australia is appalling. Their approach to dealing with the mandatory code as agreed by the national cabinet makes a mockery of the decisions by state and federal governments. The landlords are demonstrating that they are a law unto themselves.
On top of extraordinary demands for personal and business financial information, some landlords are refusing to put anything in writing, demanding that the matters are discussed. I suspect this is so there is no record of the discussions.
Shopping centres, major shopping centres, are empty. People are not visiting. This is not due to the retailers. The retailers should not have to bear the costs of their tenancy if the centre is not delivering the people expected to be in the centre in the usual course of business.
Governments have to step in here and help address what is now a crisis for independent small business retailers because the landlords are acting, together it seems, agains these most vulnerable retailers.
This is why I support an immediate three months rent free arrangement – to provide time for politicians to actually understand the problem and to realise that their decisions so far, while made with the best intent, have disadvantaged small business retailers and pushed SME retail to the brink of collapse … because of appalling behaviour of shopping centre landlords.
While it sounds melodramatic, this is a crisis for many families around Australia. It has been made a crisis by the landlords and their disinterest in fair resolution of the situation brought about through no fault of SME tenants yet for which SME tenants are having to carry the majority of the financial cost.
How small business retail tenancy landlords are ignoring the national cabinet’s MANDATORY CODE OF CONDUCT SME COMMERCIAL LEASING PRINCIPLES DURING COVID-19
More and more landlords are pressuring independent small business retailers to provide information prior to them considering negotiating rent relief.
It appears to be that these landlords are doing everything possible to delay agreeing to any offer.
There appears to be a co-ordinated campaign by landlords to slow access to relief to small business tenants. Here is an example of communication I have seen from a national real estate company sent to all tenants in a small shopping centre.
The landlord is sympathetic to the impacts of COVID-19 and echo the Prime Minister’s comments that Landlord’s and Tenants need to work together during this unprecedented time.
Following the announcement from the Prime Minister and National Cabinet on 7 April 2020, there has been further clarity on the proposed amendments to legislation and the now released Mandatory Code of Conduct.
As stressed by the Prime Minister, tenants are still obligated to honour their leases and its terms throughout this period. The landlord is committed to providing an equitable solution, but we expect tenants to respond in kind.
The landlord is willing to provide support to retailers so all parties can emerge from the current challenging environment. We would recommend that all tenants have the following information prepared, so we can move quickly on any responses and support all retailers in a proportionate and equitable manner.
- • Evidence that the business has made application for the “Job Keeper” assistance and has a turnover of less than $50 million (in which case the mandatory code will apply);
- • A statement of financial position, outlining income, expenses, assets and liabilities (preferably audited or certified by a chartered accountant), as at 31st March 2020;
- • Year to date and recent financial year financial statements for the impacted tenancy
- • FY’19 and year to date FY’20 P&L
- • Balance Sheet;
- • Sales turnover history for 24 months to March 2020 by a Certified Accountant
- • Documented evidence of their application and acceptance for assistance from the ATO, State Govt, Federal Govt. and Franchisor where applicable.
- • Report from an accountant or financial advisor with evidence that the business has experienced a substantial reduction in its ability to pay rent due to the impacts of COVID- 19;
- • Summary of major debt obligations and whether any repayment holiday has been offered by the financier;
- • Other relevant information depending on the nature of the business, for
- instance, evidence of a decline in sales or loss of clients/projects and the consequential anticipated turnover for the current quarter, which shows how circumstances have changed as a result of COVID-19 since 1 March 2020;
- • What arrangements are currently in place for the ongoing operation of the business, such as work from home arrangements and whether staff have been stood down; and
- • Whether the tenant holds business interruption insurance that covers the payment of rent and outgoings and if the circumstances for a claim on that insurance have been triggered.
- • Business Plan looking forward as to actions planned post lockdown and beyond.
We thank you for your understanding during this difficult and unprecedent time.
The code of conduct is clear. Plenty of the information being requested by this real estate agent is not covered by the code. Worse still, plenty of what they are requesting will require small business retailers to spend unnecessarily to provide the information.
Take the supply of turnover data. Most shopping centre retailers provide turnover data monthly. To now ask for certified data, which will cost more, is nonsense. It’s like the landlords say they do not trust the data they have bene receiving for years.
How some retail landlords are misbehaving in dealing with COVID-19 relief requests from tenants
Here is a list of information requested by some retail tenancy landlords, including some shopping centre landlords where tenants have registered for JobKeeper, advised they qualify for JobKeeper and provided retail turnover data (in the usual format supplied to the landlord) showing declines of between 30% and 75%. Landlords have asked for information prior to opening discussions on rent.
Note: the list is not from the one landlord.
- Business bank statements for the last 2 years.
- Personal bank statements for the last 2 years for all business owners.
- Tax returns for the last 2 years, certified by your accountant.
- BAS statements for the last 2 years.
- A personal assets list for each owner or shareholder for the business.
- A full stock listing showing age and value of all stock.
- A list of all other businesses you own.
- A list of all other retail tenancies you have.
- Details of all state and federal government COVID-19 related funding and or grants you have applied for.
In my view, landlords have no right to this information. The CODE OF CONDUCT agreed by the national cabinet is clear. If a business applies and meets the criteria for JobKeeper, their lease falls within the details of the code.
The only data points that matters are comparative revenue. This can be provided in the form that has been used for years with most landlords. Their request for it in a different form is not part of the done. Indeed, I suggest that any such request is outside the good faith goals of the code.
I think it is critical that retailers advise state and federal politicians when their landlords seek information outside the code, like any of the information on the above list. At the time of advising politicians, I also suggest advising the office of federal small business and family enterprise ombudsman, the shopping centre council of Australia, the treasurer, prime minister, premier / chief minister, local small business commissioner as well as your local council.
Landlords and tenants have clear obligations under the code. From what I am seeing, too many landlords are misbehaving in their requests for information. I doubt this is due to ignorance. I think it is to create a barrier to providing financial relief to tenants. If it continues, more retail businesses will close for good.
Why the national cabinet position is not sufficient help for retailers – SME retailers need a 100% rent subsidy for 3 months
While the decision of the national cabinet over a week ago on a mandatory code for retail tenancies of small to medium enterprises is welcome, it gets nowhere near addressing the urgent and dire financial challenges facing many small business retailers.
Having talked with many retailers in a range of channels since the adoption of the code, the biggest challenges are being faced by those in larger centres. Whereas many, not all but many, high street and independent landlords are agreeing deals that are usually considerably better than forecast in the code, shopping centre landlords are slow to negotiate and demonstrating no willingness to go beyond the code.
The code allows for a rent reduction based on the quantum of reduction in revenue. In one business I know of with base rent at $16,000 a month, turnover is down 50%. The code suggests a rent reduction of 50% on the basis of the revenue decline, with half of the reduction being waiver and half being a deferral.
The retailer in my example could expect a waiver of $4,000 a month and a deferral, to be paid later, of $4,000 a month. That is if their landlord is fair in their approach.
The decline hit the retailer from early March. The landlord says the code will not apply until April.
Prior to COVID-19, the business had annual revenue of $1,130,000. It’s average GP% then was 35%. Out of the $395,500 GP it paid $192,000 in rent, $143,000 in wages and $42,000 in overheads, leaving $18,000 in profit – in broad terms.
Revenue is now down 50% and is likely to fall further. In addition to the decline in revenue has been a shift in what shoppers purchase. The average GP% has fallen to 29%.
Here is what an average month looks like. This example does not allow for retail peaks and troughs, like winter. Revenue: $47,500. GP: $13,775. Rent: $8,000. Wages: $5,000 with hours significantly cut. Overheads: $2,800 with all possible cuts made. The business is in the hole for $2,025 a month. However, in the rent number in this example, I have not factored that half of the reduction, $4,000 is deferred, not waived. This makes the hole worse.
The owners are at maximum borrowings. They have no fixed assets against which to borrow.
The question the owners have is – do we continue to trade and lose $2,025 a month plus the $4,000 a month deferral and in six months and be at least $36,150 worse off? … knowing that realistically, the loss will be closer to $80,000 based on the current trajectory.
Talking to the owners their position is the government regulations on social distancing are what have stopped people shopping. They created the situation where our business is now no longer viable. While we support what they have done, they have left us with a financial obligation that we are considering not accepting. We think going into administration now is the best option for us, to not extend our personal exposure.
This scenario is not uncommon. It demonstrates the inadequacy of the SME retail tenancy code of conduct.
I accept it is a complex issue to address. I think that state and federal governments need to immediately agree to themselves fund 100% of occupancy costs, rent, outgoings, marketing, for 3 months from April, with a goal of a better plan being developed prior to the end of June.
That move would keep landlords and retail businesses afloat. The downstream benefit would be cash in the economy, people in jobs, fewer businesses collapsing and, I suspect, lives saved.
Note: this example is not one of my businesses and is not a newsXpress business.
Unified industry lobbying of shopping centre landlords
This week, ALNA has lead discussions with the newsagency marketing groups Newspaper, nextra, newsXpress and The Lucky Charm to agree a unified approach to shopping centre landlords on challenges resulting from the impact of COVID-19. ALNA sent the following to the Shopping Centre Council of Australia.
2nd of April 2020
Angus Nardi
Executive Director
Shopping Centre Council of AustraliaCc: Kate Carnell, COSBOA
RE: Australian Lottery & Newsagents Association letter to SCCA requesting landlords to immediately play a bigger role in addressing the COVID-19 Pandemic with their Tenants
Dear Angus,
The Australian Lottery and Newsagents’ Association (ALNA) is the national industry body representing Lottery Retailers and Newsagents’ who represents small businesses in almost every rural town, regional centre, urban and metropolitan shopping centre in Australia.
There are over 4000+ Lottery Retailers and Newsagents’ in Australia. They are an important and trusted part of Australian communities and approximately 35% of the Australian population visit these small businesses at least once a week (source – Retail Doctor Group Insights study).
The current COVID-19 Pandemic is impacting our small retailer’s businesses in a significant way. Newsagents and Lottery Agents are not businesses with huge financial capacity or large margins, they are generally mum’s and dad’s, family enterprises, who are having a go, being their own boss and working hard to make a success of their business.
Their biggest immediate concern now to surviving this crisis, is their financial capacity to continue to pay rent to their landlords during the crisis. Many are reporting that they will have limited capacity to continue to pay rent over the several months it may now take before any recovery in customer visitation occurs after social restrictions are lifted.
When they have reached out to landlords and their representatives as almost all have, and as the Prime Minister has suggested they do, to have a conversation about sensible rent relief and abatement to meet the requirements of their business surviving this crisis that is no fault of their own, they are consistently and overwhelmingly met with delay and obfuscation.
Examples include:
- Landlords and their representatives who simply point to government or bank support as the only solution.
- Landlords and their representatives who ask tenants to sign a confidentiality agreement before any discussions can occur.
- Landlords who have asked retailers to dip into reserves (assuming they have them) and pay up, saying every business should have sufficient funds to operate with a downturn in business for at least a few months. We expect our April invoice to be paid.
- Landlords and their representatives who use delaying tactics like requiring evidence that tenants have accessed every single state and federal support scheme announced and who require detailed P&L’s and projections in a fluid global crisis that no one can realistically predict.
We are relying on each other to get to the other side of this crisis, and many businesses have stepped up in this crisis, banks have for example stepped up to assist individuals, businesses and landlords alike, providing short-term solutions to get each other through and governments across the board have as well.
But when it comes to landlords being asked to step up, they roll out the good work of others as solutions to the predicament of their small retailers, and ask for unrealistic bureaucracy to delay outcomes or conversations actually occurring, rather than contributing consistently to shoulder the load they abrogate all responsibility.
This behaviour puts the mental wellbeing of many small business owners and their staff at risk in a crisis, and this is un-Australian and disrespectful to your members business partners and our community more broadly, who are all in this crisis together with you.
Consequently, we are writing to ask your industry to step up, to show some leadership and to genuinely partner with your commercial tenants, to help see them through the crisis through immediate dialogue and delivering rapid outcomes.
—-
In conjunction with the four major Franchise and Marketing groups in our sector, which include; The nextra Group, Newspower, newsXpress and the Lucky Charm Group, who collectively represent approximately 1000 retailers, along with the rest of our members who are not part of these groups, we are asking you and your members to do this without delay.
Many many of these businesses are tenants in your members businesses, we ask that your organisation and your members do significantly more to address this consistently objectionable behaviour.
We believe arrangements between landlords and our retailers’ that properly acknowledge the significant reductions in turnover occurring, are immediately put in place without delay, as the Federal Government have done. Then as a result, reduce commercial rent payments immediately and in the case of those tenants who have already paid for April rents, refund them.
For these effected businesses, rent payments will need to be reduced to close to zero in most cases for six-months as this will be critical to their survival, as it will be for the long-term survival of your members businesses. For shopping centre and CBD newsagency businesses, we seek an immediate measure to suspend all rent related obligations for three months with no change to rental period and no requirement to catch up rent that would have been paid in the suspended period and a commitment to review an extension of this six weeks into the three months.
Re-starting rental payments after the crisis will deliver small retailers the capacity to continue in business and landlords will still have tenants able to pay reasonable rents as a result. The alternative is broken lives, empty shops and having to offer six-month or more rent holidays to attract new tenants
We implore you to work with us on this to find a sensible solution now. This remains the big piece of the puzzle that is still unresolved and urgently required to make it possible for small businesses to go int a semi-hibernation state during the crisis and to not lose the capacity to come out the other side.
We thank you for your time, consideration and support.
Yours sincerely
Ben Kearney
Chief Executive Officer
Australian Lottery & Newsagents Association
Shopping centre landlords need to address the occupancy cost issue
Another newsagent is about to exit a major shopping centre in Melbourne following months of negotiations on rent. With an occupancy cost of 22% and a business gross profit of 34%, once you allow 12% for wages, there is nothing left for overheads and the owners.
While one could argue a higher GP and higher revenue would address the issue, and you would be right, these goals take time to achieve. Often, the annual 5% rent increase in the lease makes achieving these goals challenging. However, in this case, the lease restricted how far from a traditional newsagency the retailer could expand. The damn permitted use clause strikes again.
If the business was not charged a marketing fee by the landlord they may have stayed and done somewhat better. I say this as the operators have consistently promoted outside the business and the centre to attract new shoppers. It is doubtful the marketing by the landlord landed any significant traffic in the business. Hence, the comment about the considerable marketing fee paid.
If shopping centre landlords want newsagencies or newsagency like businesses to remain in their shopping centres they need to consider their rent model for these types of businesses.
I like the idea of a flat percentage rent, a percentage of turnover. I’d agree to a premium even for this of, say, 13%. However, as long as there are people lining up to sign leases and able to borrow to pay rent landlords will not feel compelled to address the issue.
Of course, from a channel perspective, a major issue is poor margin on some core newsagency lines – meaning we either replace them with better margin lines or the suppliers change decades-old practices.
Something has to give.
Note: I have no commercial involvement in the business mentioned whatsoever.
A breach of trust: the theft of a newsagency business
A long term newsagency family with two businesses was finding things tough. They had been trying to negotiate a solution to an expensive lease in a shopping centre, relying on help from an advisor with whom they had had a commercial relationship for such matters.
With each offer rejected and cash reserves perilously low, they decided to close the business. The landlord agreed.
They were shocked to discover a close business associate of their advisor, someone well connected with the company their advisor is part of, signed a lease for a newsagency business for the space they vacated, a considerably better lease than they were advised the landlord would agree to for them.
Their many years of work building goodwill for the business was lost when they gave up the tenancy. That goodwill is the gain of the party stepping into what was their space.
While I am no lawyer, here are questions one could ask the advisor, the business they are part of and the landlord:
- How do you explain your associate getting a better rent deal than the newsagency family, who are also business associates?
- When was the first discussion with the landlord about a possible change of tenant?
- Who instigated the discussion?
- What specifically was discussed?
- Did you disclose the details of all discussions between yourself and the landlord with the newsagency family? If not, why not?
- Why did you not ever disclose that another party, also a business associate, might be interested in the business of the newsagency family?
- What are your financial dealings with the associate who has not got the tenancy?
- Is the associate who has not got the tenancy in a commercial relationship with your business similar in nature to that the newsagency family had with your business?
- How many other times when you have been negotiating on behalf of a business associate has the landlord rejected their offer only to subsequently accept an offer from another party with whom you are associated?
- What are your qualifications to represent any tenant in negotiations with landlords?
- What are your qualifications to represent the interests of the newsagency family?
- How was the transaction but to Tatts? What specifically did you or your associate represent to Tatts?
I would also seek access to all correspondence, written and electronic, between landlord representatives, the advisor, the now new tenant and any related parties.
This could be a case worth litigating as I see it happening too often. It would only be through litigation that the matter could be properly and fully explored. However, our channel being what it is, individual newsagents rarely litigate.
Note: To avoid litigation against me and to protect those involved, identifying details of this story have been necessarily left out.
What can newsagents do to achieve a better retail tenancy occupancy cost?
The usual go-to place for any discussion about reducing occupancy costs is the landlord. Retailers, including newsagents, blame their landlords for high occupancy costs.
The thing is, we all sign our leases. We all agree the terms of our leases. While leases from years ago can be problematic today, the challenges of our channel were obvious ten and more years ago.
Here is a list of things I think newsagents and other retailers could do to improve their occupancy cost situation where occupancy cost is the ratio of all lease related costs to revenue for products (and commission from agency lines). You should also assess it as a ratio of GP.
There are many steps one can take to improve the occupancy cost situation:
- Negotiate with the landlord. I place this first as it is the usual go-to place for retailers. If you plan to seek a better deal, make sure you have a strong commercial case, a case backed by evidence. However, also know that a rent reduction does not provide long-term, growth like, benefit.
- Grow your overall GP%. Do this through broadening your product mix with a focus on sought-after higher than average GP% for your business items. It depends on the suppliers from whom you purchase and the extent of point of difference you leverage in what you sell.
- Increase foot traffic. Do this through ranging more diverse products and promoting your business outside the business. Success with this depends on the range of inventory you offer and how this is promoted outside the business. It depends on the reasons why you attract people to your business.
- Increase basket depth per transaction. Do this through shop floor engagement, sales counter product placement, key traffic freeway disruption and your business format.
- Increase GP for everyday items over which you have pricing control. Plain and simple – increases your prices. Success with this depends on thoughtful adjustment where you know it can be done without reducing unit sales volume.
- Broaden the appeal of your business. This idea picks up on some thoughts above but adds more. Here is what I mean – your business up to today attracts shoppers for a set range of reasons / purposes. Note those down. Now, contemplate adding sought-after considerably higher than average GP for your business products and / or services that are genuinely new for your business and that are not satisfied by a nearby business. Each new product / service reason, if successful, improves your occupancy cost situation.
These are items you can action right away, regardless of your occupancy cost situation. Items 2 through 6 and tasks that should be core business activities you pursue relentlessly.
The cost of retail space is Australia is higher than most countries in the world. It needs to reset. However, the level of reset necessary will not happen as long as people keep signing leases that are not viable.
Here is how the opportunities I have outlined above can play out. I have two scenarios for you:
- Traditional newsagency. Shopping centre based. Average GP% between 28% and 32%. $1M revenue (product revenue plus agency commission). Occupancy cost of 25%.
- Transitioning newsagency. Shopping centre based. Average GP% 45%+. $1M revenue. Occupancy cost 25% – but closer to sustainable because of higher GP%.
My core point here with this post is that as retailers we can take steps to buttress our businesses against high occupancy costs. However, to do this we need landlords to agree flexibility with what we sell as it will likely need to be outside the old-school permitted use clause for a newsagency.
There are those in this place and in our channel more broadly with strong opinions about what will work and what will not. Some even tell those in businesses and claiming success that what they claim is not possible. The thing is, we all live our own truth. For some, that is in what has happened in our businesses publicly while for others it is what we see happen daily without public disclosure.
Newsagents can run sustainable businesses in shopping centres as long as they have the right opportunities in their leases, the right approach to managing a retail business today and a love of change.
The challenge of the permitted use clause in shopping centre leases
Major shopping centres can be fierce in their interpretation and regulation of permitted use clauses in leases.
The permitted use clause details what you can sell or offer in your business.
Some newsagents are coming up against permitted use clause challenges when they evolve their businesses in response to market changes. I have and it can be a frustrating and expensive experience.
The ABC recently published a story about a hairdresser who refused a girl a haircut based on gender, because of the permitted use clause in their lease.
Vivien Houston was a regular at Jimmy Rod’s Barber Shop in The Gap Village Shopping Centre.
But when she turned up for a trim recently she was turned away because she was female.
Jimmy Rod’s managing director James O’Brien said women were not able to have haircuts at the shop because of a new lease agreement he had signed with the local shopping centre management.
It is important that anyone signing a lease does so knowing the full implications of the lease and, in particular, the permitted use clause. If I was a hairdresser I would not want my business to be in a position of turning anyone away because of gender.
It is disappointing the landlord sought this type of restriction for the barber shop. However, it is not uncommon for landlords to set permitted use stipulations that look ridiculous and non-commercial on small businesses. It is a cost of business for those of us who trade in shopping centres so I guess we often suck it up.
We are in a retail world of rapid and considerable change. Legislating borders is out of date with the retail situation of today.
Oxford Street Newsagency location still empty a year on
Taylor Square Newsagency closed a year ago. The shop remains vacant today. I wonder if the landlord now wishes they had taken a different approach to rent negotiation for an empty shop is an expensive investment to carry.
When I drove past earlier this week I was keen to see what retail was now in the place. Under the Newsagency shingle is an empty shop.
Landlords need to understand the occupancy cost benchmark for newsagents and similar businesses: 11% of turnover where turnover only includes agency commission and not total sales.
Sunday newsagency challenge: be prepared to walk away
If your lease turns out to be too expensive for your business it is on you. You signed it, you accepted the terms. This is why, during a lease negotiation, you need to be prepared to walk away.
Too often, retailers don’t walk away because they have invested considerably in their business and have not achieved the return they want, thinking that will come when the business is sold.
The reality is you make your most money while running this business. Choose this as your mindset, be prepared to walk away and any lease you ultimately sign will be better for you and the business.
How a retailer had their business ‘stolen’ from them by a franchise promoter who said they can get a better lease deal
I was contacted a few weeks ago by a retail business owner who wanted to tell their story about how they had their business “stolen” from them.
Their lease was close to being up and the head of a franchise group happened to walk in one day for a chat about business. Thinking he was talking to a colleague, the retailer shared information about the lease and issues he was having in negotiating with the landlord. The conversation ended with no help sought and no offer made.
A couple of weeks later, the retailer was visited by the same person again and told that if he wanted to keep his business he would have to join the franchise group as they had negotiated a head lease for the premises and that trading as part of the franchise was a requirement.
The retailer was given an ultimatum: walk away from the business they had owned for years or join the franchise group. He saw it as no choice as the business was his main asset. He joined the franchise group.
His experience in the franchise group was awful, business went downhill. Product arrived in-store that he had not ordered and was unable to return. He was visited and told to do things in the business he did not want to do. He was forced to pay hefty fees he had not had to pay when he operated independently.
The business went downhill and the retailer eventually sold for a lower than reasonable price. He felt he had no choice but to accept the low offer because the franchise agreement had conditions relating to the sale that made it challenging for him to sell outside the group.
The retailer concedes his naiveté and wishes he had engaged a lawyer immediately on hearing of a lease deal to effectively steal the business from him.
This is the story as told to me. While I am not a lawyer, I suspect the actions of the franchise operator and the landlord were illegal and that the retailer could have taken action. But he was broken and was happy to get out.
This is a cautionary tale.
- Never share lease information unless you are 100% certain of the person involved.
- Never take on a business where someone else holds the head lease as this gives them power over you.
- Never join a franchise when you feel you have been coerced, pressured or threatened to do so.
- If you have been wronged, be prepared to fight at the earliest opportunity to right the wrong.
Industry associations representing retailers ought play a role in monitoring and protecting retailers in this area. When they take money from any franchise group and promote them in journals and elsewhere they offer tacit endorsement. It is incumbent upon them to ensure they understand the values and processes of any such business they endorse in this way.
Yes this story is vague. The franchise group I am writing about is litigious.
AFR story on retail tenancy incomplete
The AFR story yesterday on specialty stores recording 2.8% year on year revenue growth in shopping centres in Australia is incomplete as it did not record that these stores have been hit with at least 5% year on year rent increases as agreed in their leases.
Newsagencies are included in the speciality store cohort. Given the 2.8% is an average, I suspect many will have recorded a sales decline. This is the challenge for long term leases – you agree to an increase based on expectations and assumptions and have to pay it regardless of what actually happens.
I’d have liked the AFR to more completely report on the situation for specialty stores – so their readers understood what while 2,8% is good, it is not enough to fund the increase in rent faced by these businesses.
Min my own situation, sales are up 17% year on year in the last quarter so I am ahead on the 5% increase in my lease. This is due to constant change in the business and thoughtfully playing outside what is expected of a traditional newsagency business.
Newsagents: beware any who claim they can get you a better lease deal
I heard this week about a newsagent who relied on someone who claimed they could get a better lease deal and ended up paying more per square metre than a nearby competitor. The lease negotiator they used negotiated the lease for a couple of newsagencies that went broke on the back of what I’d saw were poorly negotiated leases. I say they were poorly negotiated because I saw the leases and would not have agreed to them myself.
It is easy to claim to help newsagents get a better lease. Achieving a good lease requires a good business or business plan from the newsagent, diligent professional work, a co-operative landlord and a lease professional who has no vested interest other than getting the best lease deal for you.
If a newsagent asks me for lease advice, especially one in a shopping centre, my advice is to pay for the services of an independent lease professional.
Too many newsagencies have gone broke in recent years on the back of leases negotiated by parties with a vested interest. This is why I say buyer beware of people who claim they can negotiate a better lease for you.
Be inquisitive about any marketing pitch by someone or a business claiming they offer lease negotiation services or that they are favoured by landlords. Seek evidence. Seek clarification. Get it in writing and do your research.
See if the claims about lease negotiation stack up to the test of history.
Anyone can make a claim in their advertising and marketing. The truth is what matters and I know of former newsagents who would say that they wish they had done their research before believing they would get a better lease through a specific party.
Ask for before and after evidence in writing. Ask for their most recent references. Don’t accept their word, accept only proof of good they have done.
Even ask for advice from a friend or someone in whom you have trust. Don’t be afraid. The alternative is you trust them and maybe find that the lease they negotiate for you is the worst business decision you even made.
A bad lease can cost you hundreds of thousands of dollars, your home, your health and even your family. There are former newsagents with stories they could share.
This post is about no one person or business. The advice is advice anyone with your best interests at heart would give.
A Kennys Cardiology outlet closed by the landlord
The landlord moved and locked out the Kennys Cardiology operator at Robina Town Centre last week. The notice stuck to the shutter names the company holding the lease – a Kennys head office company as I understand it.
There can be all sorts of reasons for landlords locking people out. Sometimes it is part of lease negotiation with the landlord flexing their muscle. In this instance it looks permanent as hoarding has now been erected at the site.
This activity is on the back of a retreat by Kenny’s from their corporate store at they Myer Centre in Brisbane – delivering a free kick for other card retailers in the centre.
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