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Since the advent of the pandemic, retail property owners have been struggling to hold onto tenants – but lawyers have been finding a solution.
Before COVID-19 hit, finding tenants for a retail lease was rarely a difficult quest. With inflation relatively stable and few significant downturns in the broader economy, Australian retail investments generally had good returns.
The pandemic changed all that.
“A lot of property owners and tenants really struggled through the lockdown period because owners needed to pay their mortgages but weren’t getting rent from tenants necessarily,” said Andrew Grima, partner at retail law firm Bartier Perry, in a recent episode of The Lawyer’s Weekly Show, a sister podcast network to REB.
Now, in the post-COVID-19 era, Mr Grima has noticed severe ongoing effects for retail tenants and owners alike. From high interest rates to inflation, wage increases to labour shortages, the retail industry is increasingly tough.
“If you’re a landlord, it’s difficult because you’re facing higher interest rates on your loans, particularly if you’re a smaller investor. And if you are an operator, your margins are being cut to pieces,” said Mr Grima.
“You’ve only got to walk around the suburbs of shopping malls or walk around the CBD and you see it,” he remarked.
As a retail leasing lawyer, Mr Grima is often in a catch-22: he needs to come up with a legal outcome that helps tenants pay their rent, but also helps investors pay their mortgages.
His solution has been to be creative with his retail leases.
“The traditional model is you pay your base rent,” Mr Grima said. “And then you’ll be paying maybe a share of outgoings and then if your turnover hits above a certain level, you’ve then got to pay the landlord your cut of that percentage.”
In an era of plummeting retail profits, Mr Grima has increasingly turned to alternative leasing models that are based more on turnover.
“Here’s a base rent,” said Mr Grima, as an example. “But if our turnover doesn’t hit that base rent figure, it’s maxed at a certain number if our sales continue not to hit a certain benchmark over a period of time.”
Mr Grima acknowledged that this can sometimes leave landlords in the lurch, noting that some lenders can be deterred by unconventional retail leases. However, he stressed that offering alternative leasing models can be a crucial way of filling properties that would otherwise stay vacant.
Ultimately, it is a case-by-case decision. Mr Grima noted that a landlord of a small strip shop may have greater use for an unconventional retail lease than a landlord in a large shopping centre.
If done well, creative retail leases have the potential to be a win-win solution for owners and tenants.
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