Franchisee: Red Flags When Signing A Real Estate Lease

November 6, 2015

For brick and mortar franchisees, securing your real estate transaction carries a significant weight on your future success. Not only is it a substantial investment, most of the time you are locked into a long-term lease. The terms in these leases can also bind you to extensive and expensive renovations if not done properly.

As a pivotal component to your franchise, having an experienced franchise lawyer with real estate experience review your lease can give you the best advantage in securing your location. 

After reviewing hundreds and hundreds of leases, here are several red flags to look out for when acquiring your real estate lease:

Terms for Renewing Your Lease

Negotiating a long-term lease with multiple options for renewal gives your business the best long-term standing. I typically recommend franchisees look at a ten-year lease with two five-year options to renew if the franchise term is 10 years.

That’s twenty years. Most owners don’t plan on owning the franchise for twenty years. By negotiating these renewal terms correctly, you can leverage this in your exit strategy. Build in the option to transfer the lease and renewal options to a new buyer.

Often lease agreements contain terms that state the options to renew are personal to the tenant. In most cases I have been successful in having the landlord carve out an exception for the transfer of the option terms to another franchisee. This is extremely important in maximizing the value of the franchise business. Without the assurance you can remain in the lease space, the value of the franchise business is greatly diminished.

Relocation Clause

Just like relocating to an entirely new facility will be costly, so will relocating within the same complex. Typically when landlords exercise the option to move your business to an equivalent location in the facility they offer to cover the expenses. That doesn’t always account for the entire costs.

Your staff will spend time boxing up your business and getting settled in the new venue. You will need to re-educate your consumer base about your location. There will also be additional improvements at the new space.

Exclusivity

Imagine you spent three years cultivating and growing a dedicated coffee community in the complex you are located. While it may have been hard work, it’s finally starting to show in the revenue statements each month.

Then a new coffee shop opens six stores down cyphering your hard earned clients.

For franchisees at a mall or retail center, I always work to negotiate an exclusivity agreement. This bans the introduction of other businesses serving the same primary function as yours. You then retain all the good will and community you built when growing your business.

Experience Matters

Over the years I have seen countless real estate deals end in turmoil from the most unexpected elements. I’ve seen dated properties with any new tenant obligated to install sprinkler systems when renovating. Some cities have extensive requirements for alcohol permits in certain zones. While we may be at the at the turn of the 21st century, you would be amazed at the number of properties with limited to no internet support for tenants.

Not all of the elements of your lease are legal. Many different factors of your location selection impact your business. When picking your location, I encourage franchisees to find locations in complexes with anchor tenants that draw in large amounts of foot traffic. The more you can leverage their following, the better.

These are all examples of some of the components of your lease that a seasoned lawyer can help you identify in your real estate selection. In reality, they are all unique to your business model and the laws governing that area.

By partnering with an experienced franchise lawyer to help review your real estate lease, you can ensure that you create the best geographical footing to place your franchise roots. Contact me today to get started. I have a comprehensive background in both real estate and franchise law, giving you the best support available.