Don't Forget About the Lease!

franchise-agreementWhile more and more franchise opportunities are popping up in the work-from-home category, many franchise opportunities still require the franchisee to lease commercial space to run their operations. Restaurants, gyms, copy-and-ship centers, tax franchises certainly fall into this category, and there are countless other ones as well.

Purchasing a franchise that requires a commercial location adds another layer of complexity to the mix. That's certainly not to say that it can't be overcome, but just that it needs to be acknowledged and addressed proactively going into the franchise opportunity.

When a commercial lease is involved, franchisees need to consider the following issues:

  • Whether (and to what extent) the franchisor provides assistance with site selection and lease negotiation
  • Whether you will receive an exclusive territory surrounding your location (and what that "exclusivity" actually entails)
  • Any terms that the franchisor requires to be included in the lease (typically an Addendum or "Rider" included as an Exhibit to the Franchise Agreement)
  • The terms of the lease itself, and what implications they have for your specific franchise opportunity and the geographic location of your outlet
  • The interrelation between termination of your franchise and termination of your lease

Site Selection and Lease Negotiation Assistance

Many Franchise Disclosure Documents (FDDs) include disclosures about site selection and/or lease negotiation assistance to be provided by the franchisor. The level of assistance provided varies from franchise to franchise, and can range from providing a list of "recommended criteria" for good locations to actually helping you analyze demographic data, and even visiting potential locations in person to get a feel for the space and surrounding area. On the lease negotiation end, some franchisors will involve themselves in interactions with the landlord. If they do, just keep in mind that the franchisor is ultimately looking out for its own interests (understandably so), and so you'll want to have your own representation in dealing with the landlord and evaluating the terms of the lease.

Territorial Rights

Exclusive territory issues are not necessarily relevant to the lease acquisition process, but it is important to keep any territorial rights and limitations in mind when deciding on a location. The possibility of intra-brand competition (whether from other franchisees or from corporate outlets, mall kiosks, etc.) should be considered when deciding whether a particular location gives you a reasonable chance to succeed. If your territorial rights are limited, you may want to seek limitations on what types of businesses the landlord can lease to in your same shopping center or strip mall.

Mandatory Terms

Most franchise agreements for systems that involve commercial locations will include standard lease "Riders" containing provisions the franchisor will require to be included in your lease. Not much to say here, except to be aware of them, and seek concessions as necessary and appropriate to protect your interests.

Negotiating Lease Terms

The heart of the issue with commercial leases is negotiating the terms of the lease itself. Depending on the nature of the franchise, this could involve everything from rental rates to construction allowances to dedicated parking spaces to renewal rights. It is typically best to have a professional assist you in reviewing and negotiating the terms of your lease. Even if you think the terms generally "look ok," an experienced attorney will be able to spot potential issues and raise them appropriately with the landlord. It may be a good idea to take advantage of any assistance promised by the franchisor to make sure any industry-specific concerns don't go overlooked.

Interplay Between Lease and Franchise Agreement

Most franchise agreements provide that termination of the franchisee's lease (or possibly even just a default under the lease) automatically justifies termination of the franchise. This is absolutely critical for franchisees to keep in mind, and it makes negotiating the post-termination provisions in the franchise agreement all the more critical. I don't have to tell you that leases can be expensive (and often require payment of rent even after the business shuts down if the lease isn't over), so addressing post-termination obligations is a real concern. If the franchise agreement provides for payment of "lost future royalties" - the equivalent of unpaid rent under a breached lease - shutting down the franchise early can have potentially devastating financial consequences for the franchisee.

On a slightly lighter note, it is also important to make sure that the lease allows you to maintain the location for the life of your franchise agreement, and also provides reasonable renewal options (and rental rates) in the event that you seek to renew the franchise agreement after its initial term expires.

Jeff Fabian is a franchise and trademark lawyer who assists potential franchisees in getting off the ground. He also represents franchisors in developing franchise systems and maintaining registration portfolios. He can be reached at 866.545.7859, or online at www.fabianlegal.com. You can also follow Jeff on Twitter @jsfabian.

This article is provided for informational purposes only, and does not constitute legal advice.

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