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Call to standardise sticky lease renewals

Renewal options on retail leases should be standardised to ensure consistency in the industry, Marius Muller, CEO of the Public Investment Corporation's Pareto, said yesterday...
Call to standardise sticky lease renewals
© Shao-Chun Wang – 123RF.com

Historically, these options offered the possibility of retaining a retailer's tenancy at a shopping mall for longer, but this is changing as these renewals give tenants certain future rights, often with punitive effects for the landlord. On occasion, option clauses have enabled a retailer to hold a space "hostage" for decades, blocking multimillionrand improvements and expansions that would benefit a mall.

"With today's consumers demanding new and different experiences, retail property owners are more inclined than ever before to update their shopping centres and tenant mixes, particularly with the drive of new international retailers entering our market ... no shopping centre can afford to be hamstrung by a detrimental lease option," Muller said.

Pareto owns malls such as Pretoria's Menlyn Park, The Pavilion in Durban, as well as a 25% stake in Sandton City.

Renewal options can also prevent a mall from replacing a retailer that is no longer relevant, beneficial or desirable to its retail mix.

Muller said landlords were guilty of signing these agreements, often as sweeteners to secure leases with retailers in new malls.

The tenant can leave or stay at their discretion, translating into no protection for the landlord or investor, said Evan Robins, listed property manager of Old Mutual Investment Group's MacroSolutions boutique.

He also questioned whether anchor tenants would stop demanding these options that have become standard in the industry.

"The problem is that many developers are not long-term owners of shopping centres and just want to sign the retailer up to be able to build the centre, not looking five to 10 years down the line as they may have sold the centre by then. A buy-to-own developer would have a different stance. If there were more competing anchor tenants in SA malls, owners would be in a better position to try and attract better turns," Robins notes.

Source: Business Day



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