CASE STUDY: How a Melbourne based hairdressing business negotiated their new lease to maximise immediate and long term savings.
Quite simply, a lease negotiation isn’t a negotiation when the Landlord feels as though they are in a more informed position and holds all the cards! They assume a position of authority in the transaction and don’t engage in the negotiation, assuming that the Tenant will just agree to whatever terms are presented to them.
Amanda* found a new location for her hairdressing salon in a popular regional shopping centre in Melbourne that was owned by a listed institutional shopping centre owner. Amanda was very excited about the new opportunity for her business and had experience negotiating on her other salons. She had received an offer from the Landlord’s leasing executive along with the message that he had two other parties that were interested and if she was serious that she should simply sign the Letter of Offer and pay a deposit with the terms as they had been presented.
Sound familiar so far? …. Amanda was excited by the location of the tenancy, but thought that the rent was a bit expensive and also felt uncomfortable about the way the deal was being presented by the leasing executive, but she didn’t want to lose the location.
Where to go from here when negotiating a new lease?
Amanda looked to her industry body for help and guidance, who put her in touch with a Tenant Representative that specialises in commercial lease negotiation and who also has access to the same market information as the Landlord, taking away any advantage the Landlord had over the prospective Tenant. In this case, that was us at Your Leasing Co!
After a phone call with Amanda, we had a detailed understanding of the situation and Amanda’s objectives.
Tenant Representatives act on behalf of the Tenant and after an initial conversation with the Landlord’s leasing executive, at a peer to peer level, we had established that there weren’t two other parties waiting to snap up this tenancy and that it had in fact been vacant for some time. At this point, we began the negotiation process.
Amanda was quite emotionally invested in the idea of leasing this new tenancy for her business and relied on us to provide objectivity, a commercial focus and allow the appropriate strategic time frame for the negotiation to run its course.
Amanda was grateful to have an expert on her team and be able to rely on someone acting with her best interests in the transaction. We were successful in negotiating a really favourable commercial outcome.
Amanda’s Starting Position:
Amanda’s starting position was that the rent wasn’t negotiable and to hurry up and sign, as there were other parties ready to move.
Amanda’s Final Position:
We were able to negotiate the following deal.
- A rent saving of $73,960 over the 5-year term of the lease
- A resultant saving of $3,697 in the promotions levy
- A $70,000 cash incentive, $10,000 above the amount originally offered
- Total savings and value of $87,657 over the term of the lease
Additional Benefits and Value
Other elements of the leasing process that we successfully negotiated were:
- No Personal Guarantee and a Reduced Bank Guarantee. Without a personal guarantee attached to the lease, it is normally a pre-requisite for most commercial leases to then include a six month Bank Guarantee. Negotiating a four-month Bank Guarantee instead means that the funds required to provide security over the premises is limited to a much lower amount, whilst still enjoying the fact that the directors of the company do not have any personal exposure to risk over the premises.
- Reduced Fitout Works and No Site Hoarding. In most retail leases, the Landlord expects the incoming Tenant to complete a full fitout of the tenancy, irrespective of the condition of the tenancy at handover, as well as install a full hoarding around the tenancy at their own cost. Negotiating that the works required were a refurbishment of the existing fitout, rather than a whole new fitout, significantly reduced the start-up investment and entry costs and means that the Landlord’s cash contribution will cover a significant portion of those costs. It was also negotiated that if the Landlord required a hoarding to be installed around the tenancy, that it was at the Landlord’s cost, amounting to further savings for Amanda.
- Reduced Make Good. Most Tenants forget about this when entering into a new lease. Generally, at the end of the lease term, Tenants are required to return the tenancy to a bare shell, irrespective of the condition and configuration at handover. Negotiating that at the end of the lease term, no make good is required for the existing fitout, means that Amanda is able to return the tenancy at the end of the lease exactly as she found it, significantly reducing the exit costs. Make goods can range from $30,000 upwards to $100,000 plus.
- Reduced Percentage Rent. In most retail leases, the percentage rent is set at 10%, so that the Landlord can enjoy the success of your business, if you pass a certain threshold in sales. In Amanda’s case, having percentage rent set at 10% would have meant that the threshold for paying additional rent to the Landlord would have been $700,000. Negotiating this down to 7% means that the threshold for Amanda has been increased to $1,000,000, meaning that not only does she need to reach $1,000,000 in sales before percentage rent is payable, but if it is payable it is only calculated at a rate of 7%, rather than 10% of the sales over the threshold.
A fantastic outcome for the client.
Amanda was thrilled with the savings and was relieved to be able to hand over the stress of negotiating to a professional who knows the market, is able to unemotionally and commercially assess the deal and match the Landlord’s leasing executive in experience, providing her with confidence.
Your Leasing Co. specialises in Tenant Representation and negotiating lease terms for Tenants. If you have any questions about negotiating the best outcome for your new lease or renewal, feel free to call our MD, Kelly Cunningham on 0419 001 093 or email us for a no-obligation, confidential discussion.
*Our client’s name has been changed to protect privacy.