The importance of lease negotiation

How you handle a lease negotiation will have a negative or positive impact on your business for years to come, so it’s essential to get it right early on.

Challenging outlook

The Australian retail pharmacy industry is facing a challenging outlook. First, the Pharmaceutical Benefits Scheme PBS) reforms are significantly reducing the pharmaceutical dispensing revenue. Second, the degree of competition has intensified with the extraordinary growth of the big-box discounters.

Getting the best commercial terms

 In such a climate it is incumbent upon all pharmacy operators to reduce their occupancy costs wherever possible. It is surprising that in many cases pharmacy operators don’t oppose proposed increases to already high occupancy costs. All pharmacy operators need to be asking themselves if they have achieved the best commercial terms possible.

Stressful and time consuming

The lease negotiation process is an important stage that is often overshadowed by its stressful and time-consuming nature. It is made even more difficult by the imbalance of experience and knowledge that often exists between the pharmacy operator and the leaser.

On one hand, landlords such as Westfield, Lend Lease, GPT, AMP and Federation dominate the shopping centre landscape and have a huge bank of marketing intelligence and information available to them. They know what the different pharmacy banners are paying in terms of their occupancy costs across the country; they also have expert retail negotiators at their disposal.

On the other hand, pharmacy operators might be part of a major negotiation every five years, and they generally aren’t doing enough research and homework as part of the lease negotiation process.

In fact, many pharmacy operators are guilty of leaving the entire lease negotiation process to the last minute.  It’s no surprise, then, that they end up achieving a very mediocre result. If you fail to plan, you will plan to fail!

The three most valuable pieces of advice for pharmacy operators are as follows: 

1. Engage professionals with retail pharmacy industry experience to help you with the lease negotiation process, because you need to ensure you’re achieving the best possible commercial terms for your business.

2. Read and understand the contents of the lease, as this incorporates your entire commercial and legal relationship with your landlord. Much of a lease document deals with complex clauses and myriad fees. Ask these questions: Are all these clauses mandatory? Does your lease document comply with the relevant retail legislation in your state or territory? Are the proposed fees excessive? If there are any aspects of the commercial terms that you are unhappy with, you must communicate that to your landlord.

3. Never sign either a disclosure statement or a lease that you are not completely happy with. Don’t just focus on your base rent. You also need to consider your total occupancy costs with outgoings and promotional levy.

Start early

That’s why you must start the lease negotiation process as early as possible. Know where you are going, up to 18 months prior to the expiration of your lease, because landlords are doing their budgets at least 12 months in advance.

 If you know you can’t achieve the best possible terms, have a Plan B, C or D at the ready: Should you be relocating to another part of the shopping centre or moving to another shop location? As a pharmacy operator, you also need to understand how important you are to an individual owner or a shopping centre, and the underlying value that you present to a landlord. You must sell yourself and appreciate the significance of your business in relation to the wider community.

Pharmacists are highly regarded members of the community who are extremely well regarded by banks and financial institutions.

A good pharmacy operator will generate excellent regular traffic to a shopping centre or small group of shops, which is important to a landlord. They need to be constantly reminded of what you’re doing for their shopping centre.

The changing circumstances in the Australian retail pharmacy industry warrant a more assertive approach by pharmacy operators to ensure they achieve the best possible commercial terms. Do your homework and research, and start the lease negotiation process as early as possible to be able to make the right strategic decisions for your business.

 

Written by Bruce Engeman who is an independent property advocate working exclusively for pharmacy operators. 

 

 

Originally published in Westpac Industry Focus, Issue 4

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