For padel operators, property considerations are fundamental to the ability to scale a business successfully. In this guest article, Sarah Cowen, Partner in Myerson Solicitors’ Commercial Property Law team, considers the key lease arrangements operators should consider supporting their growth and long-term strategy.
For padel operators, property considerations are fundamental to the ability to scale a business successfully. In this guest article, Sarah Cowen, Partner in Myerson Solicitors’ Commercial Property Law team, considers the key lease arrangements operators should consider supporting their growth and long-term strategy.
Poorly negotiated lease arrangements can stall progress, reduce profitability and hinder an operator’s ability to capitalise on opportunities as they arise.
As a venue evolves beyond the provision of simply court space, flexibility within lease arrangement becomes increasingly important.
That’s why lease arrangements must be carefully structured to align with the business model and long-term strategy.
1. Choosing the right rent structure
For operators launching their first venue, a traditional fixed annual rent may not be appropriate due to restrained cash flow during the early stages of development and while customer numbers are growing. In such circumstances, a turnover linked rent arrangement may provide greater flexibility.
Under a turnover linked rent model, part or all of the rent is linked to the revenue generated by the business. This can assist where customer numbers and revenue are still developing as the operator is not burdened with a high fixed rental cost from day one. The landlord instead shares in the commercial risk, which may be an attractive offering if they view the venture as one that will generate significant income, which will be tied to the rent they receive.
In practice, a landlord may be more inclined to accept a hybrid model, in which there is a fixed amount of base rent supplemented by additional turnover linked rent. This provides the landlord with a minimum guaranteed amount of rent whilst allowing the tenant some protection during the early stages.
More established operators, with a multi-site offering, may instead favour the fixed rent approach. This provides predictable outgoings and can be easier to assist with wider budgeting.
Whilst turnover rent can provide flexibility and reduce rental costs during early stages and slower periods, it can also introduce additional complexity due to the detailed provisions required regarding the calculation of rent and reporting obligations of the operator, potentially slowing down negotiations. The model also places additional administrative burdens on operators and can lead to an increased potential for disputes.
Ultimately, the appropriate rental structure will depend on the operator’s current business, available up-front funds for expenditure and growth strategy.
2. Future-proofing the permitted use
Operators should carefully consider their long terms goals for any site from the outset. Whilst initially the venue may operate purely as a sports facility, many successful padel businesses generate additional revenue through ancillary uses, such as retail sale of padel equipment, food and drinks, and social spaces for events.
A narrowly drafted user clause permitting use solely as a sports facility may prevent the site being used for these activities or require the consent of the landlord for such uses. Negotiating a sufficiently broad permitted use clause to accommodate future expansion will be beneficial in preventing potential delays.
3. Securing an appropriate lease term
The upfront expenditure associated with developing a padel venue can be substantial and significant investment is often required before any revenue is generated. For this reason, operators should seek a lease term that provides sufficient security to allow the business to establish itself and build a customer base to recover the initial investment.
We typically see lease terms of 15 years. A term of this length allows operators to build brand recognition and expand their offering if there is early success.
Consideration should be given to whether the lease benefits from the security of tenure provisions granted under the Landlord and Tenant Act 1954. The provisions grant tenants statutory rights to renew their tenancy at the end of the contractual term which, for a successful venue, offers the security of business continuity.
If the landlord is reluctant to grant a lease which benefits from security of tenure, tenants could consider an option to renew for a further term as an alternative.
4. Negotiating break rights
Operators should be cautious when agreeing to landlord break rights, particularly during the earlier years of the lease term. If a landlord can terminate the lease before the operator has recovered its investment costs, the business may face considerable financial loss.
On the other hand, tenant break rights offer valuable flexibility for operators. As a business grows, operators may identify opportunities to relocate to larger premises capable of accommodating additional courts or other revenue-generating uses and in turn a tenant break clause can provide the tenant an exit right to capitalise on such an opportunity.
5. Retaining flexibility for alterations
It’s important that the lease provides sufficient flexibility for future alterations as a business develops. The ability to add further courts or expand the other offerings of a venue can be critical for growth. Modern commercial leases typically distinguish between alterations that are prohibited, alterations that are permitted with landlord consent, and alterations that are permitted without landlord consent.
Ideally, operators will want the lease to provide that minor, non-structural alterations can be made without the need for landlord’s consent. Where landlord consent is required, tenants should ensure that such consent cannot be unreasonably withheld or delayed. This reduces the risk of expansion plans being prevented or delayed by unreasonable landlord refusal.
Key takeaway
For padel operators, the right lease arrangements can play an important role in supporting long-term growth. From selecting an appropriate rent structure to securing flexibility around use, break rights and alterations, operators should consider not only what they need from a site today, but how those requirements may change as the business develops.
Taking a strategic approach to lease negotiations from the outset can help protect investment, avoid unnecessary restrictions and ensure operators are well placed to capitalise on future growth opportunities.
