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Sep, 10 2010

KEY TO LOCK-IN PERIOD

LOCK-IN period is the commitment between both the lessor and lessee regarding the occupancy of retail space for a minimal tenure in the lease.

LOCK-IN period is the commitment between both the lessor and lessee regarding the occupancy of retail space for a minimal tenure in the lease. It is that part of the lease term in which normally, the lessee is not authorised to terminate the lease and if forced to do so, the terminating party has to compensate him to the extent of costs, expenses and damages suffered by them due to the untimely termination.

Lock-in has become a norm now and gives an assurance of minimum period of continuation of lease. As per Mohan Murjani, Chairman, Tommy Hilfiger, “As every business has an element of risk, the lock-in period in the lease agreement has become a must. It ensures a fair play between both the parties. In a lease agreement varying from nine to 12 years, lock-in period of three years is a requisite.”

Run through a checklist

Before leasing space and deciding on the lock-in period, always conduct a thorough study of the demographics of the catchment area. Run through a checklist considering factors like adjacent stores or neighbours, access through public transport, parking, the traffic on the street, etc.

In this aspect, Ajay Saini, CEO, Yo! China, says, “We opened our outlet at one of Delhi's renowned malls but did not get a good response. We could not exit because we had a lock-in clause of three years. We had to bear the losses as the mall did not have high footfall due to absence of any residential or commercial area around it.”

This clearly suggests that doing research ahead of signing the lease agreement is of utmost importance. A single mistake in selecting the location could land the franchisor in trouble, as he cannot exit after signing the lease, which has a clause of lock-in.

Win-win deal

Lock-in adds to the safety of both the parties. For most of the franchisors, mall developers and owners, lock-in period is a win-win situation. It is an added comfort for the party taking up the space rather than the owner of the property because the former has the option of exiting if the retail space does not click.

V. Govind Raj, Vice-President, Integrated Retail Services, Titan, says, “Lock-in ensures that the property stays with you on the terms finalised and gives you the opportunity to do business in the manner you had planned, without interruption. It is particularly important for businesses which are in the start-up stages.”

The lock-in period gives a sense of security to the mall developers too, not just in terms of funds and post-lease agreement, but also in terms of executing the task of zoning and positioning of the brands.

Commenting on the advantages of lock-in, Sanjeev Sharma, GM, Commercial Spaces, Omaxe, says, “After deciding on the lock-in clause in the lease with the retailer (anchor brand), we work on positioning and zoning of the vanilla brands around it. It is vital to know for how long the retailer will hold the retail space because in case of renowned brands that are show runners, it is important to know their survival scenario and positioning.”

According to Susil S. Dungarwal, Chief Mall Mechanic, Beyond Squarefeet Advisory Pvt. Ltd, “Lock-in period helps the mall developer forecast the change in tenancy. It also helps him to create a right tenant mix and in conceptualisation of the mall.”

Why say no to lock-in?

At the time of boom, the clause of lock-in got camouflaged. But the unintended dent in the economy lead to slowing demand, oversupplies and hence softened the lock-in clause and rentals. For few retailers, the clause of lock-in holds no significance.

As per Vijayant Chabbra, Executive Director, Archies Limited, “The clause of lock-in is not advisable. The concept has been popularised by mall developers to safeguard their interests. Most mall developers are duping retailers in terms of providing a perfect brand mix.”

Opines Saini, “The terms and clauses regarding the lock-in period are always in favour of the developer or the landlord. After witnessing early exits, lock-in is forced to be a part of the lease agreement. Vacating the space before the stipulated lock-in period means forfeiture of deposits and in some cases, a penalty, depending on the contract drawn up by the two sides.”

Relationship returns

The relationship between the lessor and the lessee helps in softening the clause of lock-in, especially in terms of multi-location, when a retailer has presence in all the malls developed by same developer. As per some developers and franchisors, good relation between both the parties aid business. In case of multi-location transactions, the franchisor has the flexibility to shift if the business prospects do not meet the expectations without paying the required rentals.

Sliding with the slump

The rental value at malls in many major micro-markets saw a slump post-recession and even traditional retail high streets witnessed significant slide in rental values. Looking at this, many retailers and franchisors have altered their expansion plans and store formats. Many retailers are opting for shop-in-shops, kiosks and small format stores. As the lock-in clause for small format stores, especially kiosks and shop-in-shops, is comparatively less, operating through these formats could prove beneficial for the franchisor. As per a renowned developer, a franchisor must try and take a property for lesser duration, as it could be a good testing time for the franchisor.

Arif Sheikh, President, Retail, Advance India Projects Limited says, “The bigger the portfolio, longer is the lock-in period that a developer would want. But normally, bigger brands/anchor give lesser lock-in, simply because they dictate terms. There are no issues regarding smaller stores.”

Prioritise, decide

Most of the franchisees do not have the freedom to select a location and decide on the lock-in clause for a select property. Naunihal Singh, CEO, Strands Salon, says, “Franchisor gives the liberty to a franchisee to negotiate rentals after the location has been finalised. Lock-in period is one part, which the company looks into, given its importance.”

Anil Sharma, CEO, French Perfume Co. Ltd, states, “The franchisee gets everything done by the franchisor, including selection of mall, location, rentals negotiation, etc. If the franchisee is already holding any standalone outlet, then we go ahead in making the agreement directly with the franchisee.”

Post-recession retail realty market has become volatile and gullible, infusing a sense of vigilance in the lessor and lessee regarding realty facts and agreements. In this aspect, lock-in may be gaining ground but ultimately, it's entirely at the discretion of the business one is getting into.

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