1 Make sure that the lease structure is tax-efficient
Longer leases attract a higher stamp duty land-tax bill – and the taxman does not take break dates into account.
Geoffrey Silman, a consultant at solicitors Finers Stephens Innocent, says: “It is better to have a 10-year lease with an option to renew for five years, rather than a 15-year lease with a break at year 10. In reality, there’s no real difference for the landlord.”
He suggests that the difference in stamp duty can be as much as£70,000, although the exact figure will depend on the value of the lease. Retailers on very high rents will already be aware of the burden of stamp duty.
2 Check that you are able to sublet at market rent
This is a particular issue if the market falls after the lease has
Silman says: “Historically, leases have said that you have to sublet at the greater of the passing or market rent.
The commercial lease code should mean that this provision is not included, but that does not have legislative power. Make sure it is negotiated out.”
Some landlords have signed a declaration by the British Property Federation that they will allow subletting at below market rents, whatever the lease says – so it is worth checking whether your landlord is a member of the trade body.
3 Examine your service charge bill closely
Leases in a particular shopping centre will rarely be identical in terms of tenants’ service charge responsibilities, but some landlords will still try to produce a one-size-fits-all bill.
Silman says: “When you get your service charge account, make sure that everything recovered can be traced back to the lease. Ensure you are paying your correct percentage of items, such as the maintenance of landscaping or a garden area.”
Obviously, in order to do this, you also need to insist that your landlord provides you with a full breakdown of exactly how the service charge is calculated – and be prepared to challenge items that appear to have escalated without good reason.
4 Ensure that you will not be left liable for uninsured risks
Landlords may not be able to get insurance for threats such as flooding or terrorism, so it is important to make sure you are not left in a position where you have to pay for repairs – or carry on paying rent while unable to occupy the premises.
Richard Vernon, a partner at Ashurst, says that there is now a market standard backed by the lease code. “If landlords decide to rebuild, then the tenant will stay on the hook, but not pay rent until they begin trading again when the store reopens. If not, the occupier can simply walk away.”
5 Make sure that you are permitted to operate concessions or share with a group company
The use clause in a contract could prevent you from subletting to, for example, a coffee shop – something that is being considered by banks, as well as bookshops.
Vernon says that this could be a particular problem in a shopping centre, where landlords may insist on a lease that restricts you to menswear, for example. This means that you could not sell coffee – or, for that matter, womenswear – through a group affiliate.
He adds: “The landlord does not want a hotchpotch of stalls. In certain cases, landlords will argue that they have a specific food court area and that any concessions would detract from that.”
6 Be aware of clauses that affect your external space
If you are in a shopping centre, landlords may reserve the right to move stalls, signage or furniture to the detriment of your store.
Vernon says: “You need to look for some sort of protection around your shop front, to ensure that the landlord cannot put some structure in place that would affect your visibility and ability to attract customers.”
This can also be a problem in retail parks, where car parking spaces in front of a store could be taken away for landscaping unless you have exclusive use of them. In more conventional locations, it is worth checking whether the external space can be used for hoarding or advertising.
7 Plan ahead
Occupiers should start thinking about their tactics up to a year before a lease expires or a break is due.
Vernon says: “It is definitely worth thinking about your negotiating position and whether you want to force the landlord’s hand in relation to the lease. If a tenant is keen to stay and the market is reducing, it is often a good idea to make a pre-emptive strike and get a new lease sorted out based on the new market conditions.”
On the other hand, in a rising market, tenants might be better off just keeping quiet until the landlord demands a change.
8 Push for more frequent rent payments
Rents are generally paid quarterly in advance, but many – including the British Retail Consortium – say this is an anachronism. After all, retailers do not pay for anything else they purchase that far in advance.
Michael Stancombe, real estate partner at solicitors Lovells, says: “The idea that rents should be paid monthly in advance is slowly beginning to be accepted. It certainly helps retailers’ cashflow.”
However, he admits that this is usually a more successful bargaining tool if it is adopted by occupiers with strong financial covenants. Alternatively, turnover rents can offer greater security for tenants in a faltering market.
9 Limit what you cannot do without consent from your landlord
Nick Trowell, head of property finance at Heatons, points out: “Every time you apply for a consent, there could be a charge – payable not just to the landlord, but also to lawyers and the landlord’s agent.” He adds that this charge could range from£500 to as much as£1,250.
Branding is one particularly obvious area where retailers will want to make changes. Occupiers should make sure they can change their name, fascia board or style of logo without consent. He adds that tenants should retain complete control over fitout and that the landlord should not interfere with the internal layout of the store.
10 Opt for shorter leases
Lease length is generally reducing and landlords are beginning to realise that they can no longer expect institutional 25- or even 15-year leases. Increasingly, competitive trading conditions mean that retailers are not prepared to commit to the same location and rent for decades to come.
Trowell says: “Retailers do not know where they will be in 10 or 15 years’ time. There really are no particular advantages to a long lease: you pay more in stamp duty and have much less flexible arrangements.”