Five common leasing mistakes

When it comes to the complexities and outcomes of dealing with your Retail Lease, there remains five common mistakes, which when we step back from the process appear fundamentally basic; however, these points are continually overlooked.

But before we harp on these, it is timely that all pharmacies review how they hold their lease(s). I raise this due to a couple of events, one just recently and another coming in 18 months.

The recent event was the “Hail Mary” move by a Retail Franchisor (Sumo Salad) where a company which only held their leases was put into voluntary administration.

Although this is not a new strategy to have a very adjusted structure around the Lessee entity to provide some protections if things go sour it does require a high level of advice from legal and accounting practitioners to set up and maintain and is not for everyone.

Regardless of how the pharmacy ownership and management is structured, there needs to be careful consideration as to how (or who) the lease is held, as the Lessee entity can take many forms (i.e. a person, a trust, a holding company etc.).

The event on the horizon is the International Accounting Standards Board (IASB) introduction of regulation IFRS 16 on leases. Under IFRS 16 there is no longer a distinction between finance and operating leases. Leases will now bring to account a right-of-use and lease liability onto their balance sheets for all leases. IFRS 16 becomes effective for reporting periods beginning on or after 1 January 2019 (and will be known as AASB 16 leases by the Australian Accounting Standards Board).

These two events should give you cause to question how you hold and deal with your current lease but more importantly how you deal with new leases.

But that’s the complex stuff, the majority are still getting the basics wrong:

Mistake 1. I Don’t Need to Do Any Research.

Regardless of any negotiations you enter into, research is required to establish the outcomes you need to achieve. In retail tenancy leasing research is needed on your industry, your business, the shopping centre, the landlord and the current market.

Mistake 2. Waiting – Not Leveraging Time.

Every lease has two common elements, a commencement date and more importantly an expiry date. Time can be your enemy or your friend.

Make a conscious decision to leverage your negotiations. In most cases this means starting the process early. Don’t be the one waiting for the Landlord to contact you, by then it’s too late.

Mistake 3. Not Knowing the Numbers.

Make it your business to know how the real estate you lease performs for your business – not how you perform for the real estate (landlord).

Know your occupancy cost percentage and sales per square meter ratios and how these compare to industry benchmarks.

Mistake 4. Not Knowing the Costs.

Before you look at any new lease, renewal, or option, have a clear and concise knowledge of your fitout/refurbishment costs. How long you need to amortise these comfortably and make these known within the negotiations, your lease needs to reflect achieving these Key Performance Indicators as well.

Mistake 5. No Meeting/File Notes.

At each lease negotiations meeting, phone call, e-mail – make notes. Keep a file in date order that is easy to reference.

After each meeting confirm your understanding of the points back to those you meet or call.

Continue after the lease has been entered into to maintain this file and continue with your notes – you never know when you will need to rely on these to protect your position.

There are several more common mistakes made when dealing with your Lease and the Landlord/Centre Manager relationship but the five above are the ones that we have seen over the past 30 years in the retail property industry cost Lessees the most.