How Can You Best Negotiate Your Franchise Lease? Know these Five Crucial Terms

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What are the key terms that a prospective tenant of a commercial lease should consider prior to signing a commercial lease?

A prospective tenant should consider negotiating the following key terms in their commercial lease:

1. What are the Common Area Maintenance charges in the commercial lease that will be passed through to you, as a commercial tenant? Are they going to be capped?  Do you have a right to review the books and records of the landlord to ensure that the calculations are correct?

2. When does rent commence in the commercial lease?  It is not unusual, even in this day and age, to negotiate a period of free rent and/or tenant improvement allowance to be used towards the build-out of the premises. Clear definitions of when the commercial lease commences and when rent commences should be identified.

3. What is the original term and rent and renewal terms and rent? Is rent increased as a percentage each year or by a specified dollar amount each year?

4. What warranties will the landlord provide? Will the landlord warrant that both the premises and the shopping center are compliant with the Americans With Disability Act?  Will the landlord warrant that the premises and shopping center are compliant with all hazardous substances laws, federal, state and local?

5. Will the landlord provide a reduction in rent for various contingencies such as the anchor store of the shopping center remaining empty for a specified period of time or a certain number of the other stores in the shopping center remaining empty for a specified period of time?

These are just 5 of the many types of lease clauses that should be negotiated prior to signing a commercial lease.

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2 Comments

Franchisees worry a great deal about their franchise agreement, but the provisions of their lease very often has more financial and business risk.

  • user-pic George Woolley | January 31, 2014 11:15 AM | Reply
  • Nancy, I agree completely with the five key terms you have so concisely articulated. To these I would add 3 others; all of which have a decidedly "practical" bent, in that they come up very frequently in the real world.

    The first is the right to make any non-structural physical changes, additions and alterations to the leased premises, without the Landlord's consent. This is particulary important to Franchisee tennants as virtually all Franchise Agreements require the Franchisee to complete periodic remodels to bring their location up to the then current "Brand Image". Remodels are complicated enough without having to have the Landlord's review and consent to standard brand image requirements. A corollary to this should be an exception to any "Go Dark" or "Continuous Operations" clauses for up to 90 days to allow for the actual demo and construction of the remodel improvements.

    The second provision I would suggest concerns the Franchisees right to assign the Lease, either to another qualified Franchisee, the Franchisor or another qualified operator for a different, but non-prohibited use use. If the Franchisee tenant wants to sell or assign can they do so? If so, can they transfer liability and rent obligations? Or do they remain liable for the entire term, or some agreed part thereof? What level of "consent" will the Landlord have ... a unilateral prohibition, a full veto, "reasonable" consent?

    The third suggested term is not always easily obtainable, but is worth certainly worth negotiating for. It deals with "exclusivity". If the Franchisee tenant can successfully negotiate it into the Lease, it can provide substantial protection from the Landlord leasing to a major competitor in that particular location or retail center.

    Finally, I would suggest two additional areas to consider. Signage and the reqirement for any Personal Guarantees.

    Hope these additions to your list prove beneficial to anyone charged with negotiating a "balanced" Lease with a prospective Landlord. useful to any

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    This page contains a single entry by Nancy Lanard published on January 19, 2014 7:23 PM.

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