DO YOU NEED TO RENEGOTIATE YOUR RENT?
If leasing a hospitality premises, it is critical to get the lease right or your business will suffer.
Whilst recent data is showing a slow and stagnant market, one thing remains constant with any business, rent. Behind staffing costs, rent is one of the largest expenses for any hospitality venue. Therefore, it is critical that the rent payable is sustainable and the other terms and conditions of the lease are appropriate to provide the business with the best prospects of success.
Whether you are looking to extend or vary an existing lease or negotiate a new lease, it is imperative that you are aware of the common leasing mistakes affecting many licensees.
One of the obvious issues that impact on hospitality venues is that the rent is just too high. We are seeing many venue operators still paying high rents which were in place during the ‘boom’ times (and still subject to rent increases year and after year). Now that the market has slowed, discretionary consumer spending on food, beverage and accommodation has decreased. It is important that licensees are aware of when and how the rent is to be reviewed and importantly is there an ability to have a market rent review and if so, when. It is not uncommon for licensees to see neighbouring premises for lease with significantly cheaper rents and attractive leasing incentives.
Even if there is no explicit market rent review in the lease, there may be the potential to negotiate with the lessor for a rent review, variation or adjustment. If the business is really struggling, there is no harm to seek some assistance now, until things improve. It is in the interest of no one to see a struggling tenant fall further and further behind in rent, nor for the premises to become vacant.
If you find that you are locked into an unfavourable lease, the worst thing you can do is nothing. Do not let things spiral to uncontrollable levels. Some lessors understand the difficulties faced by tenants and appreciate the difficult situation they will be left in with a vacant premises in a slow market and the difficulty of attracting a new tenant, including the rent free periods that need to be offered to secure a tenant.
Even if you do not have a legal right, you still may be able to renegotiate better terms. Often we seen ratchet clauses where the rent cannot come down or very long terms where the terms and conditions are locked in and rent continually increasing. But as we have seen, the economy is struggling, so it is important to be able to review and vary the lease when times are tough.
There are negotiating strategies that we can use to entice a lessor to consider your lease proposal. There is no guarantee that the lessor will voluntarily reduce the rent, however, there are incentives that can be offered to encourage the lessor to consider your proposal which will benefit all parties in the longer term.
Licensees must take a proactive approach to provide the best chances for their business to survive. Rent is only one of a number of important terms that you need to get right when negotiating a lease.