Similar, not same
More Australian and New Zealand retailers are looking offshore for network growth than perhaps ever before.
There are many factors that drive this – the world is smaller, technology is better, stronger currencies, others have succeeded, overseas competitors coming in and domestic market saturation.
In addition to the numerous operational issues involved in expanding internationally, one significant component often overlooked is the many differences in managing an international network of real estate leases.
Some say it’s simple – find a site, sign the lease, and negotiate a renewal in five years – if only!
Do you know these terms: plus percentage rent, warranty of fitness, CAMS, co-tenancy, estoppel, desktop audit, step rent, triple net, kick out, or ROR?
If you plan to expand into New Zealand, Asia, the UK, or North America then you really ought to not only know about them, but understand how they work and what can you negotiate, or else you risk creating long term problems for your company.
Retailers who do international expansion will have a clear strategy for site selection – defined site criteria, market intelligence, demographic profiling, local broker engagement, and sufficient team members on the ground.
But once the deal is done, what commercial agreement are you left with? Does anybody understand what we should be doing? Is it the same as the REIV lease for our shop in Swan St Richmond?
Regularly we see retailers expanding internationally facing these very challenges. Some fundamentals I would suggest you be familiar with are:
- 1. Any local lease terminology and naming conventions
- 2. Commercial parameters which would be reasonable to negotiate
- 3. Established industry protocols applicable to the market(s)
- 4. Legislative differences across each market(s)
Local lease terminology
A foreign market will have its own terminology that a newcomer needs to understand, either for the simple fact they need to, or to help ensure they are not seen as ‘green’ as it may appear in a negotiation.
In Australia we call a further term an option, but in New Zealand it’s known as a ROR or right of renewal.
It can also operate differently in that there is no window to exercise just a single notification date or can even be as of right, so no landlord notice is required.
What is called outgoings in Australia and many countries is called common area maintenance (CAMs) in North and South America.
It’s similar but not exactly the same, and as explained below can be an unnecessary financial burden if not negotiated well.
In the UK and Europe they are commonly referred to as service charges.
Also in the US, triple net is a lease net of taxes (rates), insurance, and CAMs – hence the term triple net.
In Australia it is probably the most common retail lease, however, in the US and Canada it is not, and so what appears normal here may not be so elsewhere.
What about a step rent? That’s just a rent that increases (steps up) on a fixed basis. In fact the simple term rent review is very foreign in the US and Canada.
Other common terminology differences include fitout incentive – improvement allowance (US); straight line rent – FASB Rent (US); and option exercise date – notice date (US) – notification date (NZ).
Reasonably negotiated commercial parameters
When presenting at a retailer real estate conference, one NZ operative informed me of a deal where he was negotiating more than 80 lease amendments on a site owned by an Australian landlord. Maybe you’ll view your next NZ lease a little differently.
In the UK on the high street you are pretty much signing a tenancy lease for ten years, making quarterly payments, paying insurance rent, have multiple values of a metre squared (front to back) in your tenancy, and are subject to strict energy consumption and environmental provisions.
In Asia you may see a plus percentage rent clause allowing the landlord to charge one per cent (two per cent if you don’t negotiate) of sales if you don’t meet the turnover thresholds under the fixed percentage rent clause.
You will also pay these charges monthly, not over the term, so your better months are not offset.
In North America, better retailers negotiate co-tenancy clauses so that if a mall becomes X percentage vacant, or the Sears closes, they have a documented provision to vacate or go onto reduced rent.
How many department store leases are coming up in Australia that may not renew?
It’s also common to negotiate a kick out clause so that if you do not meet an agreed level of sales you may vacate the premises with a fixed penalty payment, rather than remain for the term.
Of course in better malls landlords request the same and can kick you out if you don’t perform.
Established local industry protocols
Ever heard of a retailer auditing a landlord’s outgoings budget? In Australia I’d call that pretty rare. In the US and Canada it’s called CAM auditing.
As mentioned, CAM charges are similar to outgoings. There is virtually no legislation controlling CAMs charges and it is common for tenants to negotiate out expenses not applicable to them and also to conduct desktop and physical audits on landlords.
Also in North America you might see a lease extended rather than renewed, such that the same lease document will apply for 10 or more years with two or more extensions, rather than go to the trouble and expense of a full redraft.
In NZ rent might only be reviewed every three years, either via a market review which can go up or down, or an average of CPI since the last review.
In Singapore you may be required to pay the landlord an extra monthly fee for the pleasure of having POS technology installed in your store so that your sales are reported back daily. Scary.
Specific legislative differences
In most countries there is no formal retail lease legislation.
I have said for years that the intended outcomes from the tight RSLA provisions in Australia are not being achieved.
What is intended to assist tenants is creating a restrictive environment, limiting the good ones, particularly in difficult times like the present.
In most international markets you will see very similar provisions based on English common law, however, you will be operating in an environment that is far more liberal and opportunistic for the strong negotiator.
An example in NZ: the warranty of fitness requirements must be sourced annually or your insurance cover can be voided. It’s a very simple piece of red tape, but it could really come back to bite you.
Heard about the power of an estoppel?
Upon the sale or refinancing of a property a landlord will seek sign off from a tenant(s) to confirm to the purchaser/financier that all representations made are truthful.
Legally, it can be used well by tenants in the US/Canada to ensure the landlord has done what is required – tenancy repairs, repayment of monies, lease execution etc.
When looking at expanding in an international jurisdiction having local legal representation is an essential factor.
The above are just some examples that highlight the need to have a market experienced lease negotiator and/or administrator at your disposal to at least help show you the ropes.
Expanding internationally is an exciting and potentially hugely rewarding strategy.
As the legal framework to your future global network, just remember that in the world of retail leases similar does not mean the same.
Lee Trevena is CEO of Syntek Systems, a Melbourne-based cloud software company.He has been involved in the commercial and retail real estate industries for over eighteen years in various capacities, and can be contacted on 0407 711 622, firstname.lastname@example.org or by visiting www.leaseeagle.com
* This feature first appeared in the April/May 2012 edition of Inside Retail Magazine. For more stories like this, subscribe to Inside Retail Magazine’s bi-monthly print edition here.