Retailers increasingly have the upper hand in lease negotiations, albeit with a few notable exceptions.
Shopping centre landlords have for many years held all the cards when agreeing lease terms for their retail tenants. That is now changing. Retailers are increasingly pushing back on lease terms that have been routinely accepted over the past decade, and their efforts are often successful.
Greater flexibility on break clauses is now commonplace, typically with rolling options for tenants to terminate after three or five years. Retailers looking for space in mid-market and regional shopping centres are demanding and receiving caps on service charges and refusing to agree the once non-negotiable keep-open clauses and associated penalty provisions.
Landlords facing a rise in empty units have little or no choice but to give ground on these negotiations. Yet, just as there is a shift in the balance of power in mid-market retail destinations, so too is there a change in those retail centres at the top of the market. Here, the power remains firmly with landlords – and any sense of loyalty to retail tenants is fast disappearing.
Such is the demand for space in these centres that retailers face a ‘take it or leave it’ approach when it comes to lease negotiations. That in itself is not perhaps surprising. What will worry retailers, however, are lease renewals. In many cases, they will face tough new terms, and in a few extreme examples, renewals are not being offered at all.
Brands that once would have been considered essential for a landlord’s portfolio are being dropped or edged out in favour of new retail brands as landlords seek to create a greater sense of excitement and change.
Lease negotiations are increasingly fraught as the retail landscape evolves. They will remain so for many years to come.
Vicky Hernandez is head of the retail team and a partner in real estate at law firm RWK Goodman
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