Top 5 mistakes Tenants make when selecting a retail site

Selecting a new retail site is an exciting time. It’s either the start of a new adventure or a deserved expansion opportunity. If you are going through the site acquisition process alone, then you want to be mindful of some common pitfalls.

Tenant Representatives regularly encounter those who simply lacked the knowledge base to successfully execute the site acquisition process, and are now paying the price. Here are the top 5 mistakes our site acquisition specialist saw in 2019.

  1. Know the area

You’ve heard the saying ‘location, location, location’. To select the best location, you need to be able to pre-empt the changes to the area that could occur, or are scheduled to occur, during a lease term.

When Tenants select a site for their business they often fail to answer some key questions about the future changes of the location.  For example:

  • Is the area trending upwards?
  • Any potential for building or development works which may impact customer traffic flow?
  • Is there a history of population growth?
  • Could there be any changes to the demographics that would impact the demand for your product?
  1. Failure to carry-out due diligence

Due diligence is critical and must be conducted before entering into a retail shop lease. These are a few key areas where due diligence is of the upmost importance.

Permitted Use

You must determine whether the permitted use is allowed by council or otherwise subject to council consent.  A failure to do so, and we are not exaggerating here, could mean that you end up with a premises that you cannot use for your business purposes. Worse still, you may continue to be bound by the lease. For more information, see our articleA Critical Question: Is your premises fit for purpose?‘. If you still aren’t sure about how to carry out this investigation, get in touch with our site acquisition specialist.

Current Market 

Tenants can often end up paying too much rent or not receiving commercial lease incentives simply because they haven’t done their research on the market. You need to understand the market rent, recent trends, incentive rates and what the surrounding Tenants are paying under their lease. Try to speak to the neighbouring Tenants and get an understanding of turnover and the usual foot traffic – first-hand knowledge here is invaluable.

Cost of the Fitout

Any new site will require a fitout – whether it’s a refurbishment or a full fitout. The existing layout of the premises, as well as Landlord building requirements, will impact the final fitout cost for your design. Safeguard your finances by ensuring that you have your contractor prepare a quote on a site-specific basis.

  1. Lack of special conditions

A new lease is often being moved forward by an external event – be it the expiry date of another lease, opening before the end of the financial year etc.  Be mindful that you remain focused on a negotiation strategy, and not just reaching the end of the transaction.

Furthermore, a lease will be based on the Landlord’s pro-forma. Unfortunately, many Tenants take these lease terms to be non-negotiable. Of course, this isn’t the case. The lease terms should not only be negotiated to get a better deal with more flexibility but, at a minimum, negotiated to reflect the basic needs of your business.

Consider the following examples:

  • Does the gross sales reporting procedure reflect the current accounting practices within your business?
  • Are there any ambiguous costs (e.g. hoarding)?
  • Does the standard signage provision allow for your usual signage requirements? You want to capture this to avoid any Landlord consent disputes surrounding signage approval down the road.
  • Can you make payments by EFT rather than direct debit?
  1. A lack of specificity in the heads of agreement

The heads of agreement should reflect, in detail, the discussions that you have had with the Landlord or the Landlord’s agent. It needs to provide sufficient detail around any special conditions that will allow a solicitor to draft a lease. A failure to provide detail makes the overall lease transaction lengthier and ultimately costlier. It can also have you heading toward commercial leasing disputes before the lease is even executed – which will either kill the deal or make for an uncomfortable start to a long relationship. Also, remember not to be guided by the Landlord’s agent here, they are representing the Landlord’s interest – not yours.

  1. Inaccurate calculation of occupancy costs

The success of a retail business will ultimately be determined by an occupancy cost ratio. Namely, what percentage of your gross sales was spent on leasing the business? The occupancy cost is not solely determined by the base rent, it also includes:

  • Turnover rent
  • Outgoings / operating expenses
  • Services (separately metered to the premises); and
  • Any other costs payable under the lease.

Key Takeaways?

There are a range of factors that you need to consider when you are selecting a new retail site. You also need to balance those considerations by remaining focused on your overall property strategy, not just the transaction.

If you need assistance, Liberty Leasing are experts in developing property strategies for Tenants. Our Tenant representation services include site acquisition / selection, lease review and access to an independent lease negotiator. You can contact Liberty Leasing on (07) 3359 8273 or book an appointment online here.

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