Mom & Pop Stores and Major Mall Giants: common and not-so-common ground as retail tenants

Understanding Estate Management and Lease Negotiations for Different Types of Retail Tenant

In this episode of That Retail Property Guy, host Gary Marshall explores the complexities facing small independent retailers compared to large multiple retailers in estate management and lease negotiations. Key topics include the varying landlord-tenant challenges, financial constraints, flexibility, and bargaining power of SME retailers versus large retailers. Gary shares insights on lease clauses, rent reviews, and dealing with unforeseen circumstances like pandemics. The episode emphasises the importance of professional advice and understanding one’s lease obligations for both small and large retailers.

00:00 Introduction to That Retail Property Guy

00:24 Small vs. Large Retailers: Key Differences

01:19 Challenges Faced by SME Retailers

05:07 Lease Negotiations and Bargaining Power

08:49 Impact of Economic Fluctuations

12:18 Unique Space Requirements and Configurations

15:47 Location, Location, Location

18:37 Conclusion and Final Thoughts

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Transcript

0:00

Welcome to That Retail Property Guy with your host Gary Marshall. In each podcast episode, we delve into topics relating to the particular overlap between estate management and accounts payable from the perspective of a retailer as tenant. Sharing stories and insights through Gary's unique lens, we hope you'll be entertained, enlightened, and maybe a little inspired. In this episode, let's discuss small independent retailers compared to large multiple retailers. Do they share common landlord and tenant challenges? The smaller retailer's property perspective is often driven by different criteria when compared to that of large, national, multiple retailers. In this sense, we're considering a smaller retailer as an SME, a small or medium sized enterprise. It might be one shop or a modest local chain. It might be managed by a family firm or a collective of franchisees. It might occupy space in a very flexible arrangement. Are on a fixed lease. But in all senses, we're considering that retail business in the role of tenant. So dealing with a landlord or their agents in that sense, a retail tenant is a retail tenant, whether a national chain or a mom and pop business or somewhere in between. In most cases, the SME retailer operates a welcoming, dedicated, highly focused, often specialised business. Where the store manager could also be the finance manager, the estates manager, the maintenance manager, the tax manager, the HR manager, and so on. From our specialised landlord and tenant perspective, we could consider that the most important task in that series of roles is the management. The estate manager, dealing with the lease, dealing with the landlord, juggling the property costs, including the business rates and utilities, understanding the extent of their obligation for repair, for payments, for permitted use, for making changes and alterations, and maybe also for the future. Disposing of a lease or renewing it. From any tenant occupier's standpoint, the nature of the retailer significantly influences their relationship with landlords and the lease terms and the ability to adapt to changing market conditions. It's important to recognize and consider the difference in perspective of each tenant occupier. between a small independent retailer and a large multiple retailer and the many in between. These could be influenced by scale, by operational requirements, financial capabilities and strategic goals of the tenant. The SME retailer could have financial constraints, might require different flexibility, yet have a high level of local customer engagement, goodwill and reputation. They might create their own draw for clients. Be renowned and sought out. So maybe passing trade is less relevant or it could be highly relevant. Small retailers might be located in neighborhood parades, along arterial roads or in secondary locations of a market town, while the large multiple retailer might focus on securing prime locations, possibly at the highest rent with the highest footfall, reducing risks in an operational sense and ensuring. Consistency of their brand across all their locations. Smaller retailers might have large institutional landlords, or might have small independent locally based landlords, possibly themselves not trained or fully experienced in landlord and tenant law and practice. Conversely, larger retailers might seek out institutional landlords like pension funds. But still, also might deal with local or independent property owners. This mix of perspectives allows us to recognise that, wearing our landlord and tenant hats, all retail tenants face similar challenges and can benefit from sharing experiences, knowledge or resource. In my experience, a larger retailer in a neighbourhood location often becomes a hub, a conduit, a rallying point for neighbouring smaller retailers Seeking to unite in a common objective against a common landlord, whether that's in rent review negotiations, lease renewals, or disputes about repairs and so on. And of course, I'm not saying that larger retailers estates teams should do all the work, carry their smaller neighbors, and incur the costs. Certainly there is a very Obvious point at which friendly help and support shouldn't stretch or overreach into formal advice without a corresponding formal understanding of limitations, extensive liability, restriction of responsibility. And of course, we should recognize that professional advice might seem disproportionately expensive to a smaller retailer. But it always helps to collude, to share ideas, to coordinate where possible. In this sense, the last thing anyone wants, whether that's the large retail or the smaller retail, is a rogue, ill advised or ill considered settlement, which somehow obliges the neighbours to follow suit. An obvious point is the relationship with the landlord when it comes to negotiating a rent or a lease. The smaller independent retailer might have or feel they have less bargaining power when they're negotiating their lease terms. Their landlord might appear to be the dominant partner in the deal I recall sitting with one small mom and pop team in their lawyer's office. Bear in mind, this was their lawyers being paid by them to give them advice and protect their best interests. The lawyer basically told them that they should accept the standard local lease, which apparently had been previously negotiated between a cartel of lawyers in the town to supposedly represent the optimum combination of landlord's interest and tenant's interest. That lawyer was talking rubbish, and the local standard lease was a load of rubbish too. This was an attempted rip off by inexperienced and arrogant legal specialists, who had offered a low fixed fee to represent mom and pop, so didn't want to do any additional work. Needless to say, with a bit of applied pressure, they changed their tune. But would an unrepresented mom and pop achieve the same outcome? And the independent retailer, whether that's mom and pop or a small local chain, may also face stricter lease clauses or higher per square foot costs due to their lack of negotiating leverage. A larger multiple retailer typically has more bargaining power and more technical advisors, so can negotiate from a position of strength, or at least be very well informed about the decisions they have to take. Their heavyweight bargaining power could drive lower rents, better break clauses, advantageous considerations such as rent free periods or capital contributions, whether those are as an incentive to take the lease, generally known as a bung, or a payment towards essential fit out works, maybe installing a staff toilet block or a mezzanine floor or Fire sprinklers, but at the end of the day, let's not forget that smaller independent retailers can often make faster decisions, take deals that don't fit into a templated corporate expectation. They can be flexible in order to be successful. There's often also a wide distinction between the typical location and space requirements for these diverse sectors. The small independent retailer, perhaps driven by budget constraints, may have to settle for secondary or at least less prime locations or layouts or sizes of unit. But their flexibility might open up opportunities for odd configurations, unconventional locations, tertiary size streets, where small specialists gather, or up and coming areas that are yet to be discovered by the multiples. It's generally considered that larger multiple retailers typically require significant floor space. Although that's not always the case. There are many nationally represented retailers who search out small footprints or convenience rather than prime pitch locations in high traffic areas. A big retailer's space requirements might be dictated by standardised shop fit layouts, commercial practices, stock volumes, and so on. And we need to consider the role of anchor at any location. We'll come back to the understanding of a retail anchor a bit later. But suffice to say for the moment, it's the idea of the main attraction. A store which attracts lots of customers, so builds the footfall for customers. The other neighbouring retailers rely on. And it isn't unusual for a local neighbourhood convenience location to be anchored by a multiple. Whether that's a well known convenience brand, a betting shop, a takeaway, a service or of course a charity. In this sense of course even charities can be retailer tenants with leasehold obligations, liabilities and responsibilities. From another aspect, retailers must always be cognizant of potential fluctuations in sales, especially in uncertain economic climates, maybe a pandemic, maybe after an election. During the COVID lockdown, many retail tenants were faced with having to continue to pay rent, despite their shops being shuttered due to government intervention. Okay, some landlords, and notably some big institutional landlords, were very quick to offer rent free periods. And I'm saying offer. Not to be reluctantly pressured, but being open and voluntary about it. Hats off to them. They voluntarily took a loss in income stream without being required to, simply from a moral standpoint. Hey, it's nice to say something nice about landlords. But many retailer tenants found their less sympathetic landlords were reading their leases and not seeing any clauses which obligated them to suspend rent during a pandemic. So they were expecting to be paid on time, as usual. The retailer tenants challenges were were not the landlord's problem. Maybe they expected that the retailer's insurance would cover it, or that the retailer had sufficient funds in reserve to simply absorb it. And certainly that was the landlord's expectation for larger retailers. Lots of sympathy for the independent trader in the press, in government, on social media, but less noise on behalf of major multiples. So all retailers, whether large or small, might find their incomes falling below the level required to sustain their outgoings when faced with a large challenge like a pandemic or atrocious weather. And it's not just limited to acts of God or nature. There are many businesses who suffered loss of trade or disruption through recent activity by environmental activists or through action by militant trade unions, which caused an unforeseen blip in footfall, in passing trade, in regular trade. So, how do retail tenants plan for such risks and deal with such circumstances? The risk of not being able to meet rental obligations might be more immediately pressing for small independent tenants. They might have foreseen this. They might have agreed very flexible lease terms that allow them to exit or downsize with relative ease. But they might have paid a premium rent to secure those flexible terms. And then what happens at review? Particularly if the lease dictates the hypothetical assumptions on which a review should be negotiated. And which might say, assume a willing tenant. But willing doesn't necessarily mean desperate, or ill advised, or reckless, or underdog. So the conditions which existed in real life when the actual lease was agreed, might not apply in the hypothetical lease being negotiated at rent review or for rating purposes. And if at this point you're unsure what I'm talking about but it sounds relevant to your position right now, then I urge you to seek advice from a professional with relevant experience in this sector. Consider the costs of failure to understand. By comparison, larger retailers usually have more financial resilience and might be expected to more easily bear the risk and consequence of a downturn. They are often less concerned about short term local fluctuations because they can absorb costs across a larger national network of stores. However, even large multiple retailers still prefer leases with a degree of flexibility. such as break clauses or rent freeze which kick in, in the event of a pandemic or other act of god. It might be easy, perhaps too easy, to distinguish between SME retailers and large retailers based on a perception of net worth. It's easy to assume all big retailers are rich, but of course, they have massive overheads SME business doesn't have. In terms of head office costs, distribution costs, and corporate responsibility. In some cases, that comes to light in terms of tenant shop fittings or improvements. Bigger businesses might have a corporate brand or standardized sales floor layout, so need to throw money into a fit out suited to their specific purposes. An SME might just shoehorn themselves into whatever space is available, including all those quirky angles and low headrooms that big brands might ignore or box out behind racking. It never ceased to amaze me when I was measuring retail shops on behalf of tenants at RentReview, just how much usable space was lost behind racking, just because their floor layout teams liked straight lines. In some places, I sensed there was a substantial void. But couldn't actually see it, or reach it, past a floor to ceiling barricade of shop fitting. But often I was able to survey reasonably accurately, by inserting a straightened coat hanger, or something similar, into the smallest gaps. In one extreme case, while measuring up a retail shop in a market square in the Midlands, I realised that the shopfitters had created something like a film set, a straight sided box of flimsy partitions, stud wall and suspended ceilings, to create the illusion of a modern shop unit, but within a much older and irregular building. Even when probing between the joints with a repurposed coat hanger, I still couldn't establish where the actual wall was somewhere behind those partitions. So I kept looking, and then I found a concealed door, with a large key. I let the store manager know that I was going exploring, and set off through the door. The building carried on. And on, and on. There were some stairs going down, so I went down them, and there was a basement, which went on, and on. And then, to my surprise, it opened into what seemed to be an abandoned World War II operations centre, with old maps on the wall, and charts, and notice boards. I figured, by now, I must be somewhere under the market square, and there beyond was another door. Through this door, I found some crude wooden steps, leading upwards to a trapdoor. Which I tentatively pushed open and scared the living daylights out of a guy sitting in a staff room reading the Daily Mirror. But I quickly realized that we were now in a different shop entirely, somewhere else in the market square. Also connected to this underground room. What appeared to be the tenant's shop Mast, a much larger building. Back at the office, I re read the lease and was able to establish just how much or little of this rabbit warren was actually included in the demise of the lease, and to get a better understanding of what to value for rental purposes, notwithstanding the apparent dimensions of the shop fitted retail space. Just because the tenant isn't using it doesn't mean it shouldn't be considered for value at review. But just because it exists doesn't mean it's of practical use or benefit, particularly if the ceiling height drops below the threshold defined in the RICS Code of Measuring Practice. Understairs is usually a cupboard, not prime sales space. So while we're mining this rich seam of comparisons, let's consider location, location, location. In many commercial retail schemes, whether that's a small parade, a neighbourhood mall, an edge of town retail park, a regional shopping centre or a destination out of town development, location can be a big motivator. Not for every retailer, but for many. Let's consider it a general rule. Some landlord developers will actively seek out a partner for a new scheme. A big retailer with sufficient presence to exert a gravitational pull, enticing shoppers from far and wide. These prime retail presences are often described as the magnet or the anchor for a scheme. And their location within the scheme then drives demand and rents. The closer in proximity to their location, the higher the demand, and so the higher the rent, and so on. This isn't always the case, but the idea of close proximity to the big attraction gave rise to the idea of prime pitch. Describing the ideal location in any scheme or town centre may be characterised by that presence of the most powerful retail brand that pulls everyone in. But maybe also governed by factors like proximity to car parking or bus stops, local places of employment and so on. Locations that are slightly more different from the prestigious prime pitch might be measured as 80 percent prime or 60 percent prime, or as the percentage decreases. A secondary or even tertiary. As locations move from prime to tertiary, so does demand and so does rental expectation and business rate levels. But not every retailer wants to be in and to pay for prime pitch or 80 percent pitch. Some SME businesses and some larger multiples are happy with secondary or tertiary, especially if they themselves are strong enough in their community to be their own draw, to be their own magnet or anchor. A good reputation, strong presence, established goodwill can all boost a retailer's business almost irrespective of the location. And as we loop back around while wearing our landlord and tenant hats, we might consider a big difference between SME and larger businesses is in the extent of their professional representation. Independent retailers might not have in house estate management teams and might consider external advisors to be disproportionately expensive. So their ability to fully understand lease clauses may be limited, which might put them at risk, or at least at a disadvantage, in negotiations. By comparison, larger retailers typically have more experience with complex lease agreements, maybe have one to one relationships with buyers. and can apply some resource to align their business goals with favourable outcomes. So in conclusion, we could say it's a case of horses for courses, that there are reasons for and against upsides and downsides to either situation, whether that's SME or larger retailer. A small independent retailer's perspective might be driven by financial constraints, but they can also take advantage of flexibility and swift decisions. Larger retailers might have more clout, but can also be slowed or restrained by corporate process. But one thing overlaps, and that's the need to know your lease obligations, know your rights, understand the rules. If you feel you need any advice or support in this area, then please, seek out a professional advisor with the relevant experience in the right sector. Don't risk taking an expensive shortcut, or being obligated to follow somebody else's. I hope you found this informative, possibly inspiring. Look out for other episodes on this subject and join me again soon. Thank you for listening to That Retail Property Guy. I hope you enjoyed today's discussion and found it both entertaining and insightful. Don't forget to explore more episodes and if you have ideas for future topics, feel free to share them below. Be sure to like, share, and subscribe so you can never miss an episode. For more information, visit ThatRetailPropertyGuy. com. Thanks again for tuning in!