For businesses that need and depend on high human traffic flow, shopping malls would appear to be an obvious choice as a preferred business location, especially in a place like Malaysia where people spend a considerable amount of time in malls to, in colloquial terms, ‘lepak’.
The allure and excitement of securing a unit in a popular shopping mall with high foot fall tends to result in the potential tenant rushing to secure the spot ‘if the price is right’, often paying little heed to the other onerous contractual terms, which the landlord typically insists are ‘standard’ and applicable to all other shopping mall tenants. We highlight some important considerations that a tenant should be aware of before signing off on the ‘standard’ tenancy agreement provided by the shopping mall landlord, which if ignored, could result in direct financial implications.
Monthly Rental (based on turnover)
The monthly rental is usually calculated based on the following formula (or a variation of it), or a percentage of the tenant’s gross turnover (e.g. 15%), whichever is higher:
Base rent + service charges + promotion charges + % (e.g. 1%) of gross sales
By comparison, the monthly rental for residential or office unit would usually be a fixed sum and not subject to the tenant’s gross turnover. As such, depending on the tenant’s turnover, the rental amount could fluctuate from month to month, and become more of a variable cost rather than a fixed overhead. The formulae and definitions determining the monthly rent can get complex and requires close inspection.
Financial Disclosure & Point of Sale system
As the tenant’s gross turnover directly affects the monthly rental amount payable to the landlord, landlords would usually require tenants to submit financial reports on their gross turnover or even to implement a point of sale system dictated by the landlord which allows landlords to track the tenant’s sales daily. Such submissions of figures are required to be made within a stipulated timeframe, failure of which the landlord would be entitled to liquidated damages or even an immediate forfeiture of the tenant’s deposits. In some cases, the tenancy agreement would also provide that in the event of any discrepancy between the actual gross turnover amount and the amount submitted to the landlord, whether due to negligence or otherwise, the tenant would also be liable to pay damages to the landlord. In addition, the tenant’s books and records including invoices, sales receipts, purchase orders, may also be subject to the landlord’s inspection or audit. While landlords typically justify that these terms are purely a ‘deterrent’ against manipulation by the tenant of its financial figures, such clauses must be carefully studied and negotiated. Also, be aware of the timing as to when the % of your gross turnover is payable to the landlord (i.e. daily, weekly, or at the end of the month), as that will directly impact on your cash flow.
Right to Relocate
Notwithstanding the initial agreement as to the location of the premises, it may be subject to change as tenancy agreements often reserve the unilateral right for the landlord to relocate the tenant to a different part of the shopping mall. Although a ‘fair’ clause would include the right of the tenant to either accept or terminate the agreement, this would inevitably result in disruption to the tenant’s business and massive costs for relocation and renovations, if the clause is invoked by the landlord.
Tenants are generally allowed to carry out fit-out works before the commencement of the tenancy, but this is usually on the condition that the tenant pays to the landlord a renovation deposit and that the works must be completed within strict timelines, failing which hefty daily penalty/liquidated damages will be imposed, even though the delay may not have been within the tenant’s or the contractors control (an example of a clause that should be re-negotiated to address such potentially costs risks). Further, notwithstanding the completion of the fit-out works, the renovation deposit is commonly retained until the end of the tenancy as security for re-instating the premises, which should be factored into the tenant’s cash flow requirements.
Tenants are required to operate their business in accordance with the landlord’s stipulated business hours, which is typically 7 days a week, from 10 a.m. – 10 p.m., including public holidays, failure of which (unless prior approval is given) will entitle landlords to be paid liquidated damages. Tenants should therefore be prepared to hire enough manpower, and consider overtime salary obligations, to undertake this in order to avoid incurring the liability to pay damages to the landlord.
Upon entering into the tenancy agreement, tenants may not make any changes to their trade name without the prior approval of the landlord.
Requirement to Renovate
In addition to keeping the premises in tenant-able repair, tenants may also be required to renovate the premises every few years. While it is unlikely that this clause can be removed, the tenant can negotiate for a specific period of advance notice to be given, allowing the tenant sufficient time to prepare for the relocation.
Based on the preceding paragraphs which showcase the measures landlords take to safeguard their interests, it comes as no surprise that early termination of the agreement by the tenant will normally result in damages in the form of rental for the unexpired term being imposed, which should be resisted wherever possible. Even though the inclusion of this right in the agreement does not automatically entitle the landlord to such damages as the right depends on, among other things, whether the landlord is able to prove that it has suffered such losses and that the amount is reasonable, it is nonetheless important to negotiate for more room for flexibility (e.g. ability to terminate after a fixed period or upon the occurrence of certain events) since the terms of the contract will generally govern the relationship between the landlord and the tenant unless the matter is escalated to the court for its intervention or interpretation on the application of the terms (which should be avoided where possible).
Before making the decision to rent a space in a mall, businesses should be prepared to pay not just the monthly rental but other additional costs that are not immediately apparent (e.g. renovation deposits which are typically retained until the tenancy ends, the landlord’s legal fees + stamping fees).
After carefully reviewing the terms, businesses should also avoid falling into the error of making wholesale acceptance of the terms on the understanding that they are “standard” and therefore non-negotiable. The extent of which a shopping mall’s tenancy agreement is negotiable depends on a number of factors, including: each party’s bargaining power (e.g. how much the landlord wants the business’ presence in the mall), the size and location of the premise rented, and the shopping mall’s general management approach (i.e. take it or leave it or open to reasonable discussion).
In fact, notwithstanding the general reverence towards “standard” terms, some shopping malls (including established ones) are actually open to making reasonable compromises that are acceptable to both parties prior to signing the tenancy agreement. Thus, businesses should attempt to tactfully negotiate reasonable or better terms, or at least limiting the highly onerous ones.
This article was written by Shawn Ho (Partner) and Adryenne Lim (Legal Executive). Shawn has been named as a recommended lawyer by the Legal 500 Asia Pacific 2018 for Corporate and M&A. He leads the corporate and commercial practice group of Donovan & Ho.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, corporate advisory and tax advisory. If you have any queries, please contact us.