Key considerations when taking a lease of a unit in a shopping centre

Leasing a unit in a shopping centre can be a great opportunity for retail or leisure businesses looking to tap into a large volume of foot traffic and establish a presence in a popular location. However, before signing any lease, it’s crucial to be aware of several important factors that can influence your business’ long-term success. Here’s a guide to some of the things to look out for when considering a lease of a unit in a shopping centre.

1. Lease Term and Renewal Options

The lease term is one of the most critical aspects to consider. Typically, leases in shopping centres are between five to 10 years – though they can be longer – and negotiating and agreeing the best duration for your business can be very important. It may be possible to secure renewal options which give the tenant the right to extend the lease for a further agreed period following its expiry which may prevent you from being forced to vacate the unit against your desire.

2. Termination Clauses

In a similar theme to renewal options, business can be unpredictable and economic conditions may change. That’s why it is also important, if you can, to insert potential termination clauses in your lease after a set period. It may, for example, be helpful in a five year lease to have a break option after three years or in a 10 year lease to have a break option after five years. If your business doesn’t perform as expected or if you need to relocate, these clauses will allow you to exit early and avoid you from having to pay rent for the entire lease term.

Be sure to review any conditions attached to either renewal or break options. They will invariably require that notice be served exercising the option by a set date which should be diarised to make sure it is not missed.

3. Alienation

The other alternative where you may need to exit early would be to assign the lease or sub-let the unit. The landlord may try and set limitations on alienation so these provisions should be carefully considered to make sure the landlord requires to act reasonably when considering any applications for consent to assign/sub-let.

4. Rent and Additional Costs

While rent is the most obvious cost, it is essential to understand all the other expenses you might be obliged to incur. These will include:

• Rates: Business rates are charged on most non-domestic properties and the ‘rateable value’ of your unit should be verified before you sign the lease so that you can calculate the likely amount of rates that will be payable and include that in your economic forecasts.
• Service Charge: These are costs associated with the upkeep and running of the shopping centre such as maintenance, cleaning, security, heating, lighting, marketing and management of the common parts of the shopping centre including the pedestrian malls, public toilets etc. These costs can add up significantly so make sure you understand exactly what is included. It may be possible to include ‘service charge exclusions’ in your lease i.e. costs that you will not be responsible for and these should be considered carefully. Management charges could perhaps for example, be restricted to an agreed amount and refurbishment costs could be excluded. If you are really concerned about service charge, it may also be possible to try and agree a cap on the amount you pay each year. Some landlords are amenable to these in some circumstances even if only for the initial year or years of the Lease.
• Percentage rent: In some cases, a lease may provide for a base rent to be payable with provision that requires you to pay a percentage of your sales in addition to that base rent. The sales which are and are not be included in that turnover calculation need to be considered, for example, you may wish for click and collect sales to be excluded.
• Rent Deposits/Guarantees: If you are a newer tenant, the landlord may insist on a rent deposit of, say, three or six months to be paid up front and held by the landlord in a separate account to safeguard against any non-payment of rent. As an alternative a guarantee from a director/shareholder or parent company may be sought.

By getting a clear breakdown of all costs in advance you can assess whether the lease is going to be financially viable for your business.

4. Store Location

The unit’s location within the shopping centre is paramount. Ideally, it should be situated in an area with high foot traffic, as close as possible to anchor tenants, or near entrances and exits. However, these prime locations often come at a premium rental. Consider whether the location will give you sufficient footfall. Different parts of the shopping centre will likely perform better than other parts of the shopping centre depending on these considerations. Marketing campaigns can potentially be agreed with the shopping centre’s management team prior to opening and remote signage options considered if it is felt these are required

5. Exclusivity Clause

One of the key terms to consider is the potential need for an exclusivity clause. This clause can ensure that the shopping centre will not lease space to direct competitors within the same shopping centre. If your business operates in a niche market this clause can prevent future competition from opening a similar business next door. Without an exclusivity clause you may find yourself in direct competition with another tenant offering similar goods or services. That could become a significant issue particularly if you do not have an exit clause.

6. Fit-Out Requirements

Most shopping centres will have specific guidelines or restrictions when it comes to the design and fit-out of your store. Before committing to a lease, ensure you understand the shopping centre’s rules regarding fit-out, signage, and the overall look of your store. There may be additional costs associated with meeting these requirements beyond your standard fit-out so it is also important to factor these into your budget. You should also consider what flexibility you may need to carry out alterations or install new signage during the term of the lease with or without the need for the Landlord’s consent where it is to reflect corporate signage etc.

7. Parking and Accessibility

Adequate parking is essential for customers, especially in larger shopping centres. Check if there is sufficient parking spaces available for your customers and whether parking is free or paid. The location of the parking area in relation to your unit should also be convenient for customers to access your store easily. Moreover, ensure that the shopping centre is accessible for all customers, including those with disabilities.

If parking is paid for, some landlords may agree to discount parking for your customers by a ticket validation system. The income generated from the car parking should also be deducted from the landlord’s overall Service Charge expenditure or the costs of maintaining the car parking excluded.

7. Operating Hours and Restrictions

Be very clear on the shopping centre’s operating hours. Some centres will have restrictions on the times when tenants can open their stores and may require you to open beyond your standard hours. These hours may be set by the landlord, and in some cases, tenants may even be required to open their stores on holidays or during specific events. Again, some flexibility in these hours can be agreed if that is raised with the landlord prior to signing the Lease.

9. Maintenance and Repairs

It’s important to know who is responsible for maintaining the unit. In most cases, tenants are responsible for maintaining their internal space, while the shopping centre owner maintains the common parts which should include the structure and fabric of the shopping centre. However, you should establish these responsibilities upfront. The landlord will recover the cost of maintaining the common parts through the Service Charge. If the shopping centre is newly constructed the tenant may wish an exclusion for structural defects or to receive collateral warranties from the building contractor/professional team.

10. Rent Review

The rent review provisions should be carefully considered including the frequency and basis of review. The normal review pattern is every three or five years and the rent is normally reviewed to the open market rent of the unit at that time or the rent increased by the same percentage increase as there may have been in the Retail or Consumer Prices Index since the rent was previously agreed/reviewed. Getting the wording correct re those review provisions is essential as it can significantly affect the new rental figure that you end up paying.

11. Rent Cessor

If the unit is unable to be used for any reason the tenant will require the ability to stop paying rent until the unit is able to be opened and used again. The most likely cause of the unit being forced to close will be damage or destruction to the unit or a part of the shopping centre that the unit relies on for access or servicing such as the pedestrian malls or the service or loading bays. These provisions should be carefully considered to make sure they are not time limited and potentially extend to uninsured risks or structural defects as well.

13. Anything else to consider?

That will depend on the particular circumstances of each unit and all factors should be considered. It may, for example, be that the tenant wishes to specifically prohibit kiosks or street furniture in the area immediately adjacent to their entrance to their shop front if the pedestrian malls are not sufficiently wide or your signage may be obscured particularly in older shopping centres.

Conclusion

When taking a lease of a unit in a shopping centre there will be many factors to consider and it is particularly important that you seek the best legal and professional advice when agreeing your heads of terms and negotiating the terms of the lease as most terms can be subject to negotiation. That will ensure that you secure the best deal possible for your business and mitigate any unforeseen costs.

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The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.