With so many aspiring retailers out there, it may seem surprising to find ‘For Lease’ signs- rather than tenants- occupying retail spaces. What’s stopping small businesses from getting their foot in the door?
Take a stroll down any suburban shopping strip and you’re likely to notice a few empty shop-fronts. The increasing vacancy rate seems to suggest a decreasing demand for retail space; but speak to any aspiring retailer and you’ll find out that this is far from the reality. Put simply, the cost and complexity of accessing retail space is becoming too high for many small businesses.
In most Australian states, legislation guarantees retail tenants a minimum term of five years. “In an ideal world, five year leases would be terrific because they give you certainty. You have both the security and opportunity to build your business and grow,” says Victorian Small business Commissioner Geoff Browne.
The reality, however, is that entering into a long-term agreement requires a sense of security that many aspiring retailers don’t have. “A lot of small businesses have limited amounts of capital- they don’t have a lot of money, they’re not in a position to take out big loans and they don’t have the security to make long-term commitments,” Browne explains.
“There’s also significant pressure on retailers in general, at the moment. With concern over consumer confidence and the like, it’s not surprising that they’re reluctant to enter into long-term leases. So in a sense, that reluctance is quite a rational response to the levels of uncertainty out there,” Browne says.
As the Small Business Commissioner, Browne handles dispute resolution between landlords and tenants, so he usually sees the bad end of retail leasing. “We see a lot of disputes where the tenants are behind on rent, or other costs, because business is not as strong as they had hoped it would be. Over the last six-nine months there have been more disputes, regarding money that is being chased up, because of the economic climate.”
The difficulties in maintaining the five-year commitment have led many retailers to opt for shorter-term options. While the minimum term is five years, tenants may apply for a five-year waiver certificate that enables them to negotiate a shorter lease term. For retailers that are unsure about the long-term suitability of the premises, this means incurring less risk. “Over the last eight or nine years, applications for those waiver certificates have grown at roughly 13 percent per annum. So there’s been a growing demand for that shorter-term option,” Browne explains.
Further along the spectrum of short-term options is the ‘pop-up’ arrangement, which has sprung up over the last few years. Rather than seeking to secure long-term uses for vacant spaces, ‘pop-up’ initiatives give creative entrepreneurs short-term access to these spaces in order to inject life back into them. In legal terms, ‘pop-up’ arrangements are specified by licence agreements, rather than leases. By entering a 30-day licence agreement, entrepreneurs avoid many of the statutory obligations, costs and responsibilities that come with a standard lease.
“One of the things a healthy environment needs is the opportunity for relatively low barriers to entry. That’s what allows people to innovate and start things,” explains Marcus Westbury, creative director of the pop-up initiative Renew Newcastle.
“A lot of cities have ended up with a dynamic where the only people who can start things are the people who already have a lot of capital and confidence. And that basically pushes us towards cities where everything is a formulaic chain store… In order to avoid that, you need to provide entry-level opportunities that allow people to experiment with new business models. That’s what we were trying to do with Renew Newcastle– lower the barriers in terms of cost and complexity, so that people could work out whether what they were doing is viable.”
The licence agreements don’t provide security of tenure, which obviously won’t suit everyone. “It certainly won’t suit you if you need to borrow $200,000 to start your business,” Westbury acknowledges. “But it does suit people in a more experimental phase. Having lease agreements, which are hard for either party to break, only serves you well if you have the confidence to commit in the long term. A lot of the most interesting creative projects and businesses don’t have that confidence, because they’re testing new ideas,” he says.
“Often, the people that we work with were selling things online, or at markets, or even in other people’s stores, prior to setting up their own stores. In some cases, these creative entrepreneurs grow very quickly into successful retailers; but at the other end of the spectrum, a lot of the people we work with find out that they’re not meant to be retailers. They realise they’re better off as makers, not retailers, and find out that retail is an unnecessary burden. We give them a chance to find that out, without incurring that risk, so they don’t have to mortgage the house or sell the kids,” he laughs.
But do these ‘pop-up’ initiatives threaten conventional retail leasing? The Small Business Commissioner doesn’t think so. “I think it’s an evolutionary sign, and you don’t want to stifle innovation. There is scope for both kinds of arrangements, provided that both parties are happy with the agreement,” Browne says.
“I think if an aspiring retailer is uncertain about the future, taking a shorter-term lease through waiver, or through a pop-up agreement, is a financially sensible thing to do. It makes a lot of sense to do research on a business proposition- and if part of that research is to test a proposition through a short-term arrangement, then that strikes me as a sensible idea.”
The commitment of entering a retail lease will undoubtedly come with unforeseen costs and complexities. But if you know your options, and look before you lease, you’ll be better prepared for the commitment.
This article first appeared in Giftrap Magazine, the Australian Gift and Homeware Association’s member magazine.