The Canadian market is filled with retailers trying to get access to the best locations available. The size of Canada concentrates our markets into specific pockets of population making the supply and demand for the right locations sparse. 43% of main street retail in Canada is controlled by nine landlords. An additional 40% are controlled by about 60 landlords. The remaining 17% is controlled by just over 1,000 landlords across the country. With this type of concentrated ownership and value to a lease, it can be critical for retailers to know the following 10 points before entering the Canadian market.
1. Covenant Matters – Landlords are in the business of collecting rent and the more financially secure the tenant is the more attractive they are to the landlord. When it comes to franchise-based systems it is very common for landlords to request the franchisor to provide the guarantees on the lease. When it comes to new and emerging brands, landlords may request additional deposits and personal guarantees to provide the financial security required. Ultimately, a landlord may decide to go with the tenant that provides the greatest security which would be a reasonable expectation.
2. Tenant Mix Makes the Space – Landlords that tenant an entire plaza or mall make decisions on the tenant mix from the perspective of what will elevate the property. They provide restrictive covenants to the tenants so direct competitors aren’t able to enter the plaza. This provides the retailers the protection they need to build a market in a space without fear of a direct competitor moving into the same centre and stealing market share.
3. Know the Rent You Can Afford to Pay – When entering into a negotiation with a landlord, having an understanding of what a tenant can afford to pay is important to be aware of. Landlords have access to the research that shows the rent thresholds of different industries and sub-sections within those categories.
For example: A landlord may be aware that a restaurant can’t afford to pay more than 10% of their gross revenue in rent and based on the landlord’s expecations and history of the space, they believe that a restaurant can’t perform above $1,500,000 per year. Yet the space requires a $200,000 gross occupancy. This upsets the balance by $50,000 and is likely enough to put the restauranteur in a bind. The landlord can anticipate that the restauranteur may be coming to them within 24 months asking for rent relief or closing. And of course, the landlord would rather not go through that again and looks for a different use that can afford the $200,000 gross occupancy target that they are trying to achieve.
4. Have Your Schedule C Ready for Review – When submitting an offer to a landlord, there is a typical request of landlords to help bring the space up to speed and ready for possession by the tenant. This request usually accompanies any offer in the form of a Schedule C. This is a wish list of what you’d like the landlord to do to prepare the space. Every piece of work that is required for the landlord to do is typically built back into the lease price per square foot. Knowing the requirements of your Schedule C and understanding them will be important as the landlord will likely have questions and they are looking to know how savvy a potential tenant is in those discussions.
5. Tenant Allowance Comes at a Price – Landlords may offer cash contributions in lieu of free rent, Schedule C work or just to bump up the rent dollars. These monies are seen as part of a cash contribution by the banks which is an advantage as well. However, the cost of these monies when you back them out are substantial and impact the bottom line. When negotiating a lease, make sure you are using a NER calculator to understand the cost of these monies to your lease.
6. Restrictive Covenants – Landlords hate being told who they can and can’t lease to. Restrictive covenants are when a retailer puts restrictions on who they can and can’t lease to in their own properties and in some cases surrounding properties that the landlord may own, depending on the amount of space being taken. Be reasonable in your requests and stick to your core product. A lot of landlords will interpret these requests as an indication of how reasonable you will be as a tenant once you take possession.
7. Sign Packages and Frontage – Retailers know the value of signage and visibility. Landlords appreciate the look of a uniform plaza that provides distinct signage for each location. Ultimately, it is neither that gets to decide on sign packages, it is the city who holds the approval. Most landlords in exterior malls or plazas know the city will be restrictive in the signage offered. This will allow some landlords to ask for the right to approve the sign package and not to be unreasonably withheld, but also leave it subject to municipal approval. Most landlords with interior malls will have severe restrictions and approval requirements to ensure uniformity within the mall.
8. Finding the Right Space – The majority of great locations never get to market. There are 1,500 people in Canada that work to represent the landlord community. There are approximately 500 people in Canada that represent tenants. This creates a circle of dialogue that is shared amongst this community I am very proud to be a part. We share information on the best sites available and the most likeliest of uses for them. If you intend to try and contact a Landlord directly and don’t get a response, don’t be surprised. They receive requests daily and would typically prefer to go through a representative that vets those calls or just to deal with concepts and people they are familiar with.
9. Legal Counsel – When entering into a lease agreement you need a commercial leasing lawyer. Getting the right guidance and advice from a lawyer who has been through this several times over will help to make sure you have your rights protected. Do not use a general practice lawyer to accomplish this. It will cost you much more in the long term and can aggravate the landlord to the point of canceling the deal.
10. Lease Negotiations are the Beginning of Your Relationship – When entering a negotiation with a landlord your negotiating tactics matter. Every signback, every conversation, is being considered by the landlord as an indication of what it will be like to work with you as a tenant. Landlords want to know they will have hassle free tenants who pay rent on time, every time. A tenant that is constantly grinding and dragging out negotiations in an unreasonable manner may be considered an undesireable tenant.
Written by Shawn Saraga, senior vice president and market leader in SRS’ Toronto office. For more information about SRS Real Estate Partners, please visit srsre.com.