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May, 01 2009

Lease agreements - I

Negotiating a commercial lease agreement with property owners and mall developers can be a daunting task. Lease agreements usually depend on the location, size of the shop, duration and amenities being offered by landlord. In order to achieve a successful

Negotiating a commercial lease agreement with property owners and mall developers can be a daunting task. Lease agreements usually depend on the location, size of the shop, duration and amenities being offered by landlord. In order to achieve a successful business model a well thought and designed lease agreement is vital. Franchisors are more interested in getting their brands established and retailed from locations that offer good business prospects in the long run.

Types of lease agreements

Commercial lease agreements have changed with the course of time and depend more on nature of business being run from premises. The most commonly followed agreement is flat rent agreement as it involves minimum hassles and interference of property owners. Bimal Sharma, Vice President, Retail, Jones Lang laSalle Meghraj states, “Till now the most common and widely used model is a flat rent agreement. This is the least complicated model and creates least debating points. There is a practice of sub dividing the lease agreement into more parts, which include facilities & amenities agreement, maintenance agreement, security deposit agreement, etc.” With organised retail picking up in India, some of the brands have recently started following or prefer revenue sharing model with mall developers or property owners. Mr. Balvinder Singh Ahluwalia, President, Koutons Retail India Ltd states, “Primarily for COCO outlets we follow flat lease agreement deed. However, under the rarest of the occasions we do have a revenue sharing agreement.” Under revenue sharing model one can limit one`s spendings on rentals and share percentage of revenue generated from sales with landlord/developers. However, this would invite the other party to continuously look into accounts and sales taking place which no tenant would like to disclose. However, the mall developers prefer flat rent agreements as they believe in providing best locations and services to retailers under same roof. Rohtas Goel, CMD, Omaxe, says, “We prefer having flat rent agreements since our customers can enjoy the benefits of demand from local residents and encash the brand name and location of our malls.”

Preferred lease agreement

After finalising the type of rent agreement that suits your business form the best, one needs to consider on the duration of lease agreement i.e., whether it should be short term or long term agreement. As it takes around three years for a retailer or a franchisee to break even hence, it makes more sense to have a long term lease agreement.

According to Mr. Ahluwalia, “As an organization Koutons always believes in a long term and balanced business procedure and this applies to our arrangement with our clients as well. We believe in cultivating markets and for this anything which is short term can never be viable in nature. The lease agreement is generally for long period of atleast 7-8 years and renewable after every three years, depending upon the mutual understanding of the client and us.” Moreover, the success rate of business increases in case of franchisee, as the brand is already established with a popular base. But in case of individual retailer, a short term agreement would be of more advantage as the future of business somewhat remains unpredictable. Also, putting enough capital in rent agreement won't make much sense as the same investment can be made at other parts/stages to fuel growth of the outlet. Mr Sharma says, “Considering the margins a retailer makes, an average store would break even in the third year, it is beneficial for the retailers to extend the lease term and increase the profit making period for the store.”

Slowdown offers scope of negotiations

With global economic slowdown taking the centre stage, current property prices have followed a downward trend and have crashed 25 to 35 percent in metros, Tier I and Tier II cities. Earlier, most of the players were booking maximum space in order to meet their rapid expansion plans thus increasing rentals, and having a suitable lease deal was hard to come by. Nowadays, retailers have started negotiating rent agreements again with developers and property owners as per current property prices. With further expansions coming to almost standstill negotiating a rent agreement has become more viable than before as there is availability of space and correction in property prices. Mr. Aluwalia opines, “The economic slowdown hasn`t been a very pleasant time for us. It`s just not the realty sector but the complete industry that has faced the adverse effects of the slowdown. However the only little light of hope that we have had is the steep fall in the prices of realty, to a margin of 15 to 20 percent. This has strengthened our situation and kept the costs under check.” Hence, one should study the market, property trends and lease deal carefully and negotiate it accordingly.

Brand name behind franchisee success

Most of the international and domestic brands with strong fundamentals look for expansion through franchise model and having one such brand in kitty helps franchise to establish his business with much ease. Mr Sharma says, “Most of the international brands are working through franchisee model, and as long as they have the license to take up a store, landlords would prefer them over others.” Franchisors bring with them international experience and knowledge that help franchisees to reap the benefits. Mall developers or landlords do give advantage to franchised brands over others while undergoing a lease agreement as it would attract more footfalls and is good for overall business. The franchisors not just help the franchisees in selecting right locations but even help in finalising the lease agreement for franchisees. Shares Mr Sharma, “Even if tomorrow the franchisee wants to leave the space or change the brand, the franchisor can take control of the agreement / lease and go ahead with the store despite changing the franchisee. And in such cases, the franchisor helps the franchisee with the agreement and takes it through a complete legal process.” Adding to it Mr Aluwalia says, “We believe that our franchisees are equal partners to our brand value and hence our job does not end after we provide them with stocks. We are active partners with them be it in entering the lease agreement or the search and finalization of a location for the store.” On the other hand mall developers or property owners at high streets look for having agreements depending on the brand, market value, space required etc. Says Goel, “Depending upon the type of clients, their past records, their requirement of space, etc. we decide the term of lease agreement.”

Take caution in executing a lease deal

Lease agreements should not be taken lightly; proper discussions should be held with mall developer or property owner before signing any form of rent deal. According to Mr Aluwalia, “Entering a lease agreement is a very systematic procedure. Tangible viabilities like location, footfalls in the mall, legal approvals to intangible viabilities like commercially beneficial to progressing demand to goodwill of the mall and the title clearance are certain areas that are to be taken care of before we enter into a lease agreement.” With correction in property prices the rentals are getting reasonable and it`s the right time to clinch the best lease deal.

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