What value in a lease?

shopping, retailJust search for ‘Sumo Salad’ here on IR, and you will no doubt find Peter James Ryan’s piece on the Sumo Salad Syndrome, among other pieces. This scenario plays out multiple times in multiple centres and is symptomatic of a big shift that is happening.

FACT: The standards set by legislation reflect community expectations. It may lag a few years, but eventually the legislators catch up and make amendments and introduce legislation that gets them elected.

To understand how the relationship between landlord and tenant will change, consider how relationships have changed at a socio-cultural level.

Go back six decades and you will find that society valued the “traditional family structure”, but attitudes have shifted.

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The central theme of this societal shift is the de-valuation of the agreement between the two partners. (This is probably caused in large part by the de-sacralisation of the institution of marriage.) It is no longer for better or worse, it is ‘while it suits me’. It is no longer a promise to fulfill a specific role, it is subject to change when circumstances (and feelings) change.

The same can be seen in employment contracts. The ‘one-company-man’ is now a quaint relic that does not even warrant a footnote in the latest ‘talent management’ textbooks.

Contracts are becoming worthless. Commitment is only a commitment if both parties agree to be committed – and as soon as one changes, the other has very little option to follow. Divorce at will.

Company law still holds to these archaic principles that was agreed at a certain point in time must hold true forever. It does not yet recognise that when things change, things have changed.

But it is only a matter of time.

How much must you be owed before you think it is worth a court fight? It is rapidly increasing. How many retailers can and do – in practical terms – dishonour contractual commitments with no/limited consequence?

One of my favourite heuristics is this: “THE WAY YOU DO ANYTHING, IS THE WAY YOU DO EVERY THING.”

If people are disinclined to honour marriage or employment contracts, how long till they dishonour any other type of commercial contract too? Once we start devaluing the IDEA of a contract, it will eventually apply to ALL contracts. If people don’t hold to a contract that is intimate and personal and where they have made the most public commitment to uphold, what chance does ANY contract have of being honoured?

In this shifting marketplace, landlords need to acquire a new core competency. It used to be that you needed to be able sign long, watertight agreements with tenants to secure a steady, predictable income stream.

When the value of the agreement is nullified, the new black becomes the ability to manage and mitigate the risk associated with volatility. There are many processes/strategies you can follow to manage and mitigate risk.  Here is my top three:

  1. Get better at picking your partner. A huge part of that mitigation is the selection of the people you do business with. At the beginning of the relationship, you can’t honestly call it a partnership, so better due diligence is important.
  2. Communicate openly. Isn’t it strange how often the problems and the solutions of business essentially are reduced to one thing: people. If the ONLY time you talk to your property owner is when you want something (usually for nothing in return) it is hardly reasonable to expect the relationship to blossom into a partnership. A lockout or ‘voluntary administration’ are strategies that pretend to be solutions in all but the rarest cases. (A divorce may be the only outcome, but it is hardly to designed to assure mutual prosperity.)
  3. Make your lease agreement ‘agile’. More about that another time, but in essence it is time to re-think the lease all-together.

I have explained why the value of a contractual relationship will shift, and what I believe appropriate responses are. But the biggest challenge is that ANY change will require a concomitant shift in mindsets – for all stakeholders, including investors. Maybe investors and valuers first, then others will follow sooner rather than later.

Let’s hope that happens before untold damage is caused.

Dennis Price: Co-Founder at www.yearone.solutions.

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