Like the uncertain and seemingly interminable pause after the first dance at senior prom, the Canadian retail landscape is in a state of flux, with the landlords and retailers clasped in each other’s hands anxiously awaiting the next dance. Retailers are contending with new foreign entrants and the bifurcation of consumer preference, especially in the fashion sector, towards luxury retail and value retail, leaving mid-market retailers lonely hearts in the cold dark night. Landlords and developers are contending with scarce availability and, where available, pricey urban retail space. These dynamics have led to growing interest in the outlet malls.
As the traditional retail market reaches saturation and consumer preference continues to bifurcate, outlet malls meet the growing and under-serviced needs of bargain hunters. From the developer’s perspective, consumers’ willingness to travel some distance to outlet malls allows developers to situate them in less pricey, but accessible, suburban areas. This (together with design factors) in turn allows for less expensive rent structure and reduced operating costs, making these locations relatively more profitable than traditional shopping centres for retailers. For these reasons, the outlet malls seem to be the perfect tune for the next dance.
What are some key negotiation points in outlet mall leases? First, given the consumers’ attitude towards travelling to outlet malls, outlet malls serve relatively larger areas than traditional shopping centres. Radius clauses that place restrictions on development in the surrounding geographic area balance the landlord’s fear of cannibalism of tenants’ sales by their own nearby developments and the tenants’ need to stay agile in a dynamic environment. Second, a common feature of outlet mall leases is co-tenancy provisions that provide tenants the opportunity to terminate the lease if the outlet mall fails to reach or maintain certain occupancy level or an anchor tenant does not open or maintain operations. Related to the right of early termination, some leases have also built in a gross sales threshold, the tenant’s failure to meet which would trigger tenant’s (and sometimes the landlord’s) right to terminate the lease. Balancing the landlord’s and tenant’s interests in negotiating these key provisions may just provide the chemistry needed for the next dance…cue the music!