Navigating the complexities of Agreement for Leases in retail: an expert perspective
In today’s ever-shifting retail environment, the Agreement for Lease (AFL) serves as a critical document, outlining the intentions of landlords and retailers to enter into a lease agreement usually following an agreed package of works being completed.
The AFL plays a pivotal role in ensuring clarity on both parties’ responsibilities, particularly when it comes to the landlord’s enabling works and the conditions for handover. While the AFL process is essential for projects ranging from modest refurbishments to major redevelopment schemes, it can be strewn with complexities that require careful navigation.
As building consultants managing landlords’ works and ensuring compliance with the AFL, we are often at the heart of these negotiations, utilising technical, commercial, and interpersonal expertise to apply commercial rigour, facilitating agreement between landlords and high-profile global retailers.
Here, we explore the intricacies of dealing with owners and operators, highlighting the key challenges our experts face on a regular basis and their advice for best practice.
Working with a broad scope of occupiers
The current retail market poses significant challenges for investors. With rising vacancies in shopping centres due to the decline of anchor tenants like department stores, landlords are under immense pressure to let space, which is often achieved through alternative uses or sub-divisions. Meanwhile, experienced retail and leisure operators – keenly aware of their strong position – can be uncompromising in negotiations, leveraging their position to secure favourable terms.
On the other hand, newer entrants to shopping centres – perhaps independents or leisure operators entering the sector for the first time – may lack familiarity with the AFL process. In this case, the expertise of the building consultant is an essential tool to help guide them through the unique requirements of operating within a shopping centre, such as complex fire strategies or shared infrastructure. For building consultants, the wide disparity in occupier experience adds another layer of complexity to AFL negotiations.
Key challenges in shell specifications
A critical element of the AFL is the accompanying shell specification, which outlines the landlord’s enabling works required to prepare the premises for the incoming occupier. However, negotiating these specifications is rarely straightforward.
Larger, established retail chains regularly insist on using their own shell specifications, typically designed for generic new-build sites. But these specifications usually fail to account for the constraints of existing shopping centre buildings, which each come with their own unique set of limitations. Adjustments to align with existing structures – while mitigating risk for the landlord – can be time-consuming and require expert negotiation.
Ambiguities in shell specifications – phrases such as “to be agreed with the tenant” – risk leaving landlords exposed. Unclear terms such as these can shift leverage to the occupier post-exchange, creating potential delays or financial disputes. Within this, tenant specifications often demand features that may be impractical or cost-prohibitive for existing structures, for example: lift speeds that are unachievable when modernising legacy lifts; clear height requirements that conflict with the current building design and cannot be altered; structural loading requirements in excess of the existing capacity; excessive drainage or service demands that exceed the building’s infrastructure capacity.
On top of this, incoming retailers can sometimes push for enhancements that go beyond a standard shell, such as standardised shopfronts, screeds, vertical transportation and smoke extraction systems. Landlords should factor in the final scope of enabling works when agreeing the commercial terms of the deal.
Beyond technical expertise
Whether working on a £50,000 refurbishment or a £50 million redevelopment, the AFL is a critical legal document that shapes the success of retail leasing projects. For building consultants, the process involves much more than technical expertise; it requires a nuanced understanding of commercial realities, technical constraints, legal frameworks, and tenant behaviours.
By engaging early, fostering relationships, and focusing on clear and achievable shell specifications, consultants can help investors and operators navigate the AFL process with confidence, ensuring positive outcomes for all stakeholders.
Five guidelines for successfully navigating the AFL process
1. Get involved early
Our building consultants always aim to engage early in the AFL drafting process to ensure the landlord’s obligations align with achievable project outcomes. This proactive approach allows the landlord’s works to be planned and executed in compliance with the AFL, avoiding costly revisions or disputes.
2. Build strong relationships
Successful negotiations hinge on building positive relationships between technical teams. Strong relationships – often initiated with onsite meetings – can help resolve matters quickly and directly. While commercial teams may focus on high-level terms, technical teams can help bridge gaps in understanding, fostering practical solutions that work for both parties.
3. Tailor shell specifications
Invest time in negotiating a realistic shell specification that is clearly worded and tailored to the existing building. Avoid vague terms or clauses requiring tenant approval further down the line, which can delay progress or lead to renegotiation.
4. Mitigate risk
Be vigilant about the risks of agreeing to unachievable occupier demands. If the landlord fails to deliver on agreed specifications, tenants may demand compensation in the form of additional rent-free periods or capital contributions. Be aware in the worse-case scenario that retail and leisure operators facing financial instability may use unfulfilled obligations as a reason to try and walk away from the deal entirely.
5. Share knowledge
Given the complexities of AFL negotiations, fostering internal collaboration and sharing expertise across our building consultancy teams is vital – especially when navigating the requirements of large global retail chains. At Workman our Building Consultancy team conducts regular professional development sessions to equip consultants with the knowledge and skills required to navigate these challenges effectively.
We are currently running a series of sessions at nine locations nationwide, sharing expert knowledge and experience across our network, led by our retail expert James Ainsworth, Partner.
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