Turn lease events from growing pains into commercial gains

By Simon Matley, director for dilapidations and occupier services at TFT

After a period of acquisition, a large commercial retail portfolio can become either a major liability or a powerful cost saver for retailers who need every advantage they can get in a challenging consumer market.

For national multiples and high street brands, often with sizeable portfolios numbering in the hundreds of units, or for smaller regional operations that are growing at speed, flexibility and control are hugely important. Brands today are adapting their portfolios in light of changing consumer behaviour and omni-channel retailing, and this is shaped by the increasingly sophisticated data capture that allows them to better understand stock, fulfilment, customer behaviour, and operations. For many who have been acquiring premises over the past 10 years, they will almost certainly find that data allows them to be more efficient in the space they need, not least because of the growth of last mile logistics and on demand deliveries which enables occupiers to be nimble in how they use their spaces.

Whether they operate on the high street, in retail parks or rely on distribution centres, retailers want to scale fast, explore new territory and snap up the right premises to grow their customer base and serve them at their best.

But a period of acquisition can quickly turn into an oncoming storm of lease events, and retailer property teams are navigating multiple rent reviews, lease renewals, break clauses, and lease expiries, often in a very short time span as lease timelines overlap.

What we’re increasingly seeing across the brands and occupiers we work with in the retail sector, is that the process of switching gears from acquiring premises to managing them remains a challenge, not only for large national multiples where the portfolio risk is high, but also for fast-growing independent operators, where margins need careful handling.

By forming a clear picture of the flow of dilapidations, lease renewals, relocations, downsizing and other estate planning that lies ahead, brands can define a portfolio strategy that enables the flexibility and control that puts them in a strong commercial position before entering negotiations.

Some of the most important considerations include:

1. Defining consistent lease terms at acquisition:
   
   • When acquiring multiple sites during a period of growth, or from a standing start, occupiers should aim for consistency to their leasing arrangements – wherever possible, negotiating similar processes and avoiding variations across break and dilapidations processes.
     
   • For brands to effectively manage and plan ahead for their future requirements, they need to pay particular attention to lease end obligations. Consistency and some level of certainty at the lease end, will help to manage critical risk and cost – typically at a time when cost impacts will be most acutely felt.
     
   • Being aware of some of the more onerous conditions and the challenges they can create is also important. For example, conditional break clause, which require properties to be delivered up in good repair, decorated and reinstated. The risk here is that retailers will need to vacate the premises months in advance to get the works done, effectively doubling overheads to pay rent on both the old and new spaces.
     
     
2. Creating schedules of condition:
   
   • It is not uncommon for fast-growing retailers to find they have overlooked this important step when acquiring new spaces at speed. This is especially important for older buildings.
   • A schedule of condition can reduce the liability for repair at the end of a lease by providing a detailed picture of a premises’ state at acquisition, thereby limiting liability for repairing or reinstating come the end of a lease.
   • For example: a detailed schedule of condition can spot issues like corrosion and delamination which are common in the roofs of retail park units. If this is not documented at the outset, and then worsens over the lease period, a landlord could require a roof replacement as part of dilapidation works to return the property to full repair.
     
     
3. Avoiding costly mistakes on serving (and complying with) a break notice:
   
   • Understanding lease or break obligations. Does the lease require the premises to be returned to the landlord in repair and reinstated? That will mean a shops’ fit-out is removed, decoration restored, etc. Notwithstanding the cost considerations, this will take time and may need to be completed by the date of the lease break. For some occupiers who have assumed that ‘lease expiry’ is the move-out date, they face a nasty surprise and a hasty repair job to turn the premises around in time. In the context of dozens of lease events occurring in the same timeframe, that’s a significant risk and cost to be managed.
   • Equally, retailers must be clear on how and when notice is served. Leases often contain a break clause, but these usually require occupiers to serve a break notice correctly, giving notice of the intention to break the lease in advance (up to 12 months in advance in many cases). If the notice has not been served on that timescale, it could be invalidated and the occupier may be liable for another five or 10 years of rent on the remainder of the lease.
     
     
4. Knowing the dilapidations options:
   
   • As a lease expiry or break clause nears, occupiers will need to find the most cost-effective way through the dilapidations process. In the months leading up to lease expiry, an experienced surveyor can help identify the right path to bring a building up to repair, which typically involves negotiating a settlement with a landlord for either part or all of the remedial works.
   • As a retailer, the earlier this process is put in place, the better the ability to control the narrative of the negotiations and get ahead of it. That means defining the right costs and scope of works required, backed up by professional advice, with the right time allowed to carry it out. The alternative is occupiers finding that they have paid for works done entirely to a landlords’ own specification, and sometimes much later than expected! Landlords have six years to bring a dilapidations claim.

Lease end obligations, particularly dilapidations, remain the most significant cost when closing down a store, sometimes up to 70% of the total lease end costs. Whether for a national retailer with a large footprint, or a smaller regional operation that is fast growing, clarity on the lease end, will enable greater control and flexibility through planning and acquisition.