What should a lease agreement in the retail market (not) include?

“The model of a lease agreement was brought by foreign developers, who are usually the landlords of the malls or shopping galleries where the economic activity is conducted. In this situation, the tenants, usually Romanian residents, don’t have enough experience in negotiations adapted to the complexity of a lease contract”, Dan Ionascu (photo) told Wall-Street.

The intricacy is made up of elements such as the term when the lease is completed or when the term can be extended. Usually, terms of retail leases are for five years, but generally this type of contract can be renegotiated after three years if it’s specified in the agreement.

“Nowadays, both the lessor and the lessee want the renegotiation of the rent and thus its lineup to the market conditions. Moreover, if the tenant and the landlord have not reached a concurrence, the tenant has the option of closing the business”, said the representative of Cushman, adding that this type of option is rarely specified in the agreement, as it is very risky for the landlord.

In this situation, the landlord has no longer the confidence of further incomes, which entails an additional risk. If the option of leaving the space at any time the tenant wishes or after a renegotiation term is specified in the lease agreement, it will directly influence the market price of the space in terms of investment.

“In this case, the rents will not provide the same certainty, therefore the price of the retail space will fall immediately after. Generally the sidewalk retail spaces owned by Romanian entrepreneurs contain this type of options, due to the lack of practice and expertise”, Dan Ionascu added.

Another essential element in a lease agreement is the rent and the constituents used in calculation of the rent. Indexation of the rent influences directly the amount of the final amount of the rent and can be made taking into account the inflation rate as fixed preset coefficient.

Most of Romanian landlords don’t pay much attention to indexation even though it can prove to be crucial for the future incomes and thus, in determining the end price of the space. Indexation should be negotiated before signing the lease agreement.

The conditions specified in the contract are also very important. The status of the location after the tenant’s leave is specified: with or without any damage – at the termination of the contract or during its validity.

“A nimble landlord takes measures to avoid the abandonment by the tenant, by adding liquidated damage stipulations and collaterals”, as Cushman & Wakefield’s specialist stressed.

Furthermore, the lessee’s right to sublease the leased premises is also very important. The stipulation should be included when the two parties negotiate the terms of the contract. Thus, if the venture proves to be unsuccessful, the tenant shouldn’t leave the retail space, but should sublease it to a third party, with a commercial activity with a higher market demand.

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