"Everything is negotiable. Whether or not the negotiation is easy is another thing" - Carrie Fisher

In article 4 of this series, we suggested that a new leasing norm is needed to support economic recovery from the pandemic's impacts. In this article, a group of LPC advisors reflect on the obstacles that tenants face in pursuing this new norm and how they can overcome the tenant disadvantages of fragmentation and asymmetrical access to information. We provide insights into LPC's strategies to strengthen the tenant voice, suggesting that these strategies are adopted more broadly. 

Prevention is better than cure 

"An ounce of prevention is worth a pound of cure" - Benjamin Franklin

This statement is relevant for tenants who need to negotiate lease terms that work in good and bad times. It is challenging, and often not possible, to achieve much-needed lease term changes when the ink is dry. The problem is that changing circumstances or the impacts of an event like the pandemic on tenant utility of the leased premises necessitate change, reinforcing the need to prevent. A preventative mindset is crucial for negotiating commercial terms that mitigate the risk of unwanted surprises during the lease term. Examples are unexpected annual rent escalations, renewal options that significantly increase the effective rental, excessive make-good obligations, unplanned maintenance costs, restrictions on the use of the premises, and many other unwanted outcomes that harm the tenant enterprise. Furthermore, curing a tenant's unfriendly lease term is costly, time-consuming, potentially damaging to the landlord/tenant relationship, and often futile. There is no guarantee of the desired outcome when trying to 'cure' after the fact.

Prevention from the perspective of a retail, office, or industrial tenant requires an in-depth review of a tenant's business requirements and risks before the establishment of an accommodation brief and subsequent lease negotiations. It is essential to thoroughly analyse business risk and consider how these risks may impact accommodation requirements. Doing this enables the tenant to focus lease negotiations on critical terms, such that the landing point has stronger tenant protections. The key message is that prevention is better than a cure.

Tenant co-opetition will increase tenant leverage 

"Alone we can do so little; together we can do so much." - Helen Keller

As mentioned in previous articles, commercial tenants start in the outside lane when it comes to leasing negotiations, with landlords firmly entrenched in the inside lane. Tenants have limited access to leasing data compared to landlords who have ready access to leasing data. LPC's strategy to increase tenant influence over lease norms is to facilitate tenant co-opetition via tenant groupings such as franchisors and associations that advocate for commercial tenants. We define co-opetition as a collaboration between business competitors to achieve mutually beneficial results. It is in the interests of all tenants to influence the lease norm such that critical aspects of a commercial lease are tenant-friendly and co-opetition is a sensible strategy to strengthen the tenant's voice and influence.   

Our co-opetition strategy includes making tenant-side leasing expertise more accessible and affordable to more tenants, including SMEs and small retailers. We do this in collaboration with franchisors and associations like the National Retail Association and the Restaurant and Catering Association via an online platform that educates, informs and advises members about leasing matters. The arrangements increase tenant awareness of what to watch out for and how best to negotiate tenant-friendly lease arrangements. Co-opetition facilitates a more significant influence on lease norms.

One strong voice is better than many weak voices

"It only takes one voice, at the right pitch, to start an avalanche" - Dianna Hardy

Identifying lease terms potentially harmful to tenants requires expertise, while changing long-standing lease norms is complex and requires a unified and robust tenant voice.   

The current commercial leasing norm reflects landlord power in effectively transferring ownership risks to the tenant without corresponding tenant participation in the benefits of ownership. Tenants need to connect and collaborate to strengthen their voices to achieve a leasing norm that provides more assurances of utility value supported by strengthened landlord obligations and guarantees.

Tenants diminish their negotiating power by handling their lease negotiations one transaction at a time. For example, a multi-site retailer deals with various landlord leasing executives at different shopping centres, with each executive incentivised to protect the landlord's income streams for that shopping centre. Applying the one voice principle, multi-site tenants can increase leverage by escalating and making known their business strategy and accommodation needs to executives in the landlord organisation and establishing scheduled forums to explore improvements to portfolio-wide tenancy arrangements in support of their business. If tenants do this, they will elevate the discussion from one site to multi-site and from tactical to strategic, with one voice articulating business strategy and accommodation needs.   

At a sector level, tenant co-opetition facilitates 'one voice' to influence critical aspects of the leasing norm that need to be changed to stimulate tenant enterprise for an entire sector and to contribute to economic recovery for that sector. As Dianna Hardy says, "it only takes one voice, at the right pitch, to start an avalanche". 

Conclusion 

Remarkably, most tenants are not challenging long-standing lease norms, especially considering that tenancy arrangements can either be a handbrake or an accelerator for economic recovery. Change is overdue, and tenant co-opetition and repeated clear articulation of the need for a new lease norm will stimulate a new norm and recovery.  

About LPC & the LPC subscription service 

LPC provides office, retail, and industrial occupiers with advice and services that make a difference to their accommodation arrangements and respective businesses. With no ties to investor property owners or leasing agents, we only represent occupiers, and our advice is free from any conflict of interest that would disadvantage an occupier. You will find the LPC subscription service most beneficial when identifying key terms for renegotiation and getting to the lease you deserve.  

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