Former Ted’s Cameras managing director, Richard Robertson, talks about the traps for the unwary in retail leases, from signing the contract to handing back the keys:
The first to understand about a lease is ‘not how I get into the lease’, but ‘how do I get out of the lease’. As (retail leasing consultant) Hymie Zawatzky used to say, ‘always arrange the divorce settlement before you make the wedding vows.’
Most people don’t think about the possibility of the businesses going to shit, so it’s ‘what do you mean I’m going to lose my house, what do you mean they own all this and I’ve got nothing?’ Most people only want to hear the good things about a lease.
Be prepared to walk
The first thing you do before you enter a lease is ask a good retail leasing solicitor ‘what is the worst that could happen under this lease?’ If the answer to that is something you can’t tolerate, then don’t enter into the lease. In five years time who knows what’s going to happen? – As we know, in the last five years it has turned a bit ordinary.
So the first thing to do is to get a clear understanding of the lease you’re about to sign. It is way too late to worry about the lease you’re about to sign one to four years after you’ve signed it, when the landlord says, ‘no we’re not going to give you rent reduction, and we know we put a nail polishing kiosk out the front of your shop that blocks the signage, and we know we closed car park B and re-opened car park D, which doesn’t help your traffic flow, but there’s nothing you can do about it.’
Most people don’t even read the lease, let alone seek advice from a property solicitor. In fact they also need both someone like a Hymie Zawatzky who can consult with them on the commercial terms of the lease. That is: Where is the shop? How big is the shop? How much rent are you paying? What about the outgoings, how are they proportioned? What about things like kiosks, heights of kiosks in front of your store? What are your rights? What you pay extra for when you open on a late night which isn’t a designated late night?
– For example in some shopping centres you might trade on Sunday and find you have to pay extra in your outgoings for lighting, heating, cooling, escalators and security on top of your current lease payments.
Once you’ve agreed to the commercial terms, then you get the lawyer to look at the legal terms. The only question you need to ask is ‘what is the worse that can happen if things don’t go like I’ve planned.’ Most people won’t ask that, because they’re thinking ‘Whoopdidoo, I’m going into a new lease and they’re giving me 6 months rent free and life is good.’ The reality is that most people won’t have made money out of a new site or a new lease for two or three years because they forget that they’re paying two big handouts – one is the landlord, so there goes half your business, and the other is the shop fitter – there goes the other half of the business. Then you’ve got staff – they want want half of the business,too. Then you’re family might want half of the business and it just doesn’t work. Not everybody can have half of your business.
In five years’ time…
A good five-year plan is important, and also a ‘What Do I Do At The End Of Five Years’ plan. What are my sensitivities to rent increases, outgoing increases. The other thing that people should be starting to look at very carefully in the area of outgoings is power, electricity, water, gas… all those things are going to come around and bite retailers under the Carbon Tax.
Also all the new desal plants are going to up water rates. All these little things, they sound like they are only a dollar here, a dollar there, but if you’ve got 10 or 15 suppliers, supplying everything from your deliveries to your air conditioning, there’s another $20 a week. It’s not going to be a dollar for each one, its going to be five or ten dollars. Your outgoings might sneak up by $100 a week without you even noticing. People should do the mathematics, it’s not $100 a week. it’s $100 x 52 weeks x the number of years of the lease. That is your exposure.
You might be at $100,000 a year rent but the outgoings in total might be half a million dollars of your hard-earned money. If you fall over in Year One, they’re going to be coming after you for the balance of the the lease and you’re not going to be able to get out of it.
Talk to the neighbours
So that’s before you get into the lease. You’ve also got to talk to other people in the centre. It’s like renting a flat – you knock on the door of the houses around you and ask ‘what’s this area like? What are the tenants like? Are there any problems here… gangs or the hotel across the road? With a shopping centre you have the same problem. You can quickly find out. If you have a disgruntled tenant in a shopping centre, if you walk in there and say ‘listen, I’m thinking of opening a store in this centre and they are suggesting this area, what do you think?’ They’ll tell you.
You might find its been a dog of a store and the last four tenants have all failed because of traffic flow or any number of things.
But then once you’ve started in the lease, monitor traffic flow, monitor developments in the centre, and keep a good working relationship with the centre manager, so when things start to go pear-shaped you can say, ‘I’ve been talking to you since last month. Three weeks ago you said you’re going to close this car park for a week, it’s now four weeks. My business has dropped, my traffic flow is down, my sales are down and that’s a direct response to the change in the traffic patterns, and I want some compensation.’
Talk nice to the landlord
These things need to be put in writing all the time. When it hits the fan it’s no good walking into the centre manager office and saying ‘look mate, I’ve been struggling here for four years and you’ve done this and that and changed that, my business is down 30 percent and I’m going broke’. He will probably look at you and say, ‘well why haven’t you been up here before?’
You’ve got to document, you’ve got to put it in writing. If it gets really bad, the first person you see is your solicitor, because by then you will know what’s the worst thing that can happen under your lease.
Then you’ve got to work with a retail consultant on how to get out of the business, how to get a moratorium on rent increases, on rent itself. You won’t re-negotiate a rental deal mid-way, but there are other opportunities you can get from a landlord if you approach them in a civil, sensible way, and if you’ve got the weight of facts behind you: ‘Heres the letters I’ve written to you over the last four months saying when you did this this I said this would happen and now it is happening, and I want some relief.’
It may come in the form of a rent-free period, or an advertising subsidy. You might be able to get out of the lease as soon as they can find somebody to come in. Most landlords respond to a well-constructed and well-thought-out argument. But they will automatically go into full defence mode if you walk through the door and slam it shut saying, ‘listen you bastards, you screwed my business and I can’t make a living any more and I’m going to sue you.’
The first thing they will do is go back to their legal department and say ‘Keith Shipton is going to sue us because we’ve stuffed up his traffic flow’, and then it gets out of control. Keeping a close relationship with the landlord is paramount. It won’t necessarily change the outcome, but how it’s handled, and how you end up being treated through the deal.
Most landlords would rather negotiate with you sensibly and help you out of the business if the business is going nowhere and they know it. Much better that they try and get somebody to take over your site while you’re still there than you walking out Friday night never to be seen again.
When it’s over
Again, you’ve got to understand what the obligations are at the end of the lease. You can’t just walk in on the last day of the lease and say ‘here are the keys, thanks very much’, because in most cases – in fact in all – there will be a decommissioning of the store and returning it to the state it was in when it was handed over.
Now if there is any offers in the lease negotiations along the lines of ‘don’t worry about the strip-out, we’ll cover that’, make sure it’s in writing and in the lease, or in a letter from the person who is authorised, because stripping out a shop these days can be $15-20,000. If if you’re already going broke and the landlord lets you out of the lease, then he’s at least going to want you to fix up the store, so again before you go in and take over the store you should photograph and document every feature and every part of the store, so when time comes around to renegotiate or get out, you know what you had and there is no misunderstanding about the watermarks on the wall, or the fact that the walls were already pock-marked or painted funny colours.
There is probably little opportunity, in the specialist photographic market, to sell the business for a profit, You might be able to unload it on a walk in, walk-out basis. All landlords are like retailers: Where a speciality retailer has cameras on the shelf, Westfield has shops on the shelf.
At the moment you would think landlords would be making some concessions on leases because of the downturn. But that reduces the value of his property. It affects the valuation the banks put on the property and thus how much money they will lend against that.
Have a look at your business. Do a five-year projection and do a five year projection on the last 12 months trend in sales, the last 12 month trend in gross profits, and the last 12-18 months trend in wages and other costs.
The only line that’s going to be going up is wages and on-costs. I don’t think there will be many people saying, ‘My sales line is growing by 5 percent per annum’. Do the maths on that and be honest with yourself.
I talk to a lot of people who say, ‘business is great’, but you know it’s shithouse. Stop kidding yourself – be realistic. Do the maths, anyone can do it on the back of an envelope: ‘What I think will happen over the next five years’. Put on that graph when the lease expires, and see whether or not you’re going to survive to that point. Do a simple store contribution chart. See if the business is actually returning money. Stop taking money out of the business, and put it back into the business. Make sure you’re putting money aside for your legal obligations, for staff entitlements.
– So there’s all these little things. It’s a pain and it’s not selling a camera, but it could save your life as your lease period rolls through.
If you have some specific issues or problems with your retail lease or other aspects of running your specialty photo business, Robbo has generously offered his advice and expertise to talk these through with Photo Counter readers. Thursday mornings only! He can be contacted on [email protected]