Business, July 2019

A Matter of Time

July 1, 2019 | by Dale Willerton

Selecting the best spa lease length

The term, or length, of your salon/spa commercial lease is an important part of your business plan and ensuing lease negotiations. However, most salon/spa tenants do not take enough time to consider that one day they will eventually want to sell the business. Alternatively, they may want to expand/downsize, relocate or close and so they do not give the term of the lease the attention and consideration it truly deserves. The Lease Coach often answers lease-related questions from clients, and this issue of choosing the best lease term is regularly addressed.

Take Advantage

The industry standard lease term for a salon/spa tenant can be five, seven or 10 years (but often not shorter). We all know how elaborate salon/spas are expensive to set up and, therefore, a 10-year amortization period may be required on the initial term to justify that initial capital investment cost. Another point of consideration is that many salon/spa owners can gain certain tax advantages by entering into consecutive shorter lease terms (for example, an initial term of four years followed by two renewals – of one and five years – and pre-exercised for a continual 10-year term). Your accountant can best explain this for you, but this effectively serves the same purpose for the salon/spa tenant and the landlord, while allowing you to depreciate capital costs more quickly.

“The renewal option term is defined as the period of time which follows the initial lease term.”

Renewal Options

Lease renewal options represent part of the overall term of the lease agreement and therefore should be negotiated at this time as well. The renewal option term is defined as the period of time which follows the initial lease term. This longer term protects the tenant so that the landlord cannot either take the space back or offer it to another tenant. Renewal options can benefit the salon/spa tenant and, therefore, one to two five-year renewal option periods are common place if the landlord will agree to this.

In the real world, 10-year salon/spa leases are attractive to both the landlords and the brokers who represent them. The landlord is assured of a long-term tenant while the broker, who works for the landlord, earns a commission for the term of the lease agreement. The longer the term you sign for, the more commission a broker is likely to earn. Overall, this should give the tenant increased negotiating power since the landlord is gaining the security of a 10-year term and the landlord’s broker is earning up to twice the commission he/she would normally have expected from signing a five-year tenant.

Suppose you come to the end of your initial lease term and you have not renewed your lease. You will enter into what is called the overholding/holding over period. In itself, the overholding period is not a problem; however, many lease agreements contain a clause that states the salon/spa tenant’s rent will substantially increase during the overholding period. I have reviewed leases with built-in increases of up to 300 per cent for the overholding period. A 50 to 100 per cent increase is the industry standard. Why does the landlord charge so much? The landlord wants certainty. This is the landlord’s way of preventing you from sitting back, stalling or remaining uncommitted about signing a renewal or going month-to-month.

Time to Sell

If you wish to sell your salon/spa business before your lease ends – for instance, during year four of a five-year term – the renewal option and terms will be critical to the purchaser. It is absolutely essential that the buyer be approved by the landlord and the renewal option term is transferrable to him/her (and not personal to you). There have been many lawsuits in the United States where the business buyer assumed that, in addition to becoming the new owner, he/she would also inherit the five-year lease renewal option clause. This, in fact, is not the case as the lease renewal clause remains personal to the original tenant.

You should also know that the lease renewal term does not need to be made in five-year increments. A salon/spa tenant can renew his/her lease agreement for any length of time the landlord will agree to. Alternatively, a right of termination could be negotiated if you need flexibility in the term. A right of termination is a special clause in the lease agreement which gives the tenant the right to end the lease. This is a one-time event. If things are not going well for you into a five-year lease renewal term, you can negotiate to leave earlier at 24 months. Salon/spa tenants tell us that there are three key reasons why they turn to a Lease Consultant for their new lease and lease renewal negotiations: a) To get peace-of-mind. Bringing in a professional who has done this hundreds of times so tenants don’t make mistakes. b) To save time. With having an outside expert negotiate on their behalf, busy salon/spa tenants can concentrate on other business matters. c) To gain financial benefits. These benefits can include reducing the rent being paid by the tenant and getting more valuable tenant inducements.