Lease Basics For Franchisees

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Lease Basics For Franchisees

 

Today’s blogpost is about leases. Along with your franchise agreement and perhaps a personal guaranty, your lease is a contractual document that will be with you throughout your journey as a franchisee. In fact, many leases are written to mirror the franchise agreement in initial term and option duration. In today’s post, I’ve put together 5 important clauses that you’ll find in your lease. Make sure you familiarize yourself with these clauses before you execute your lease agreement.

Rent

Number one is your rent AND your rent increases. And all rent costs associated with leasing the property. You really have to be careful here because where you start in terms of rent payment  is not where you’re going to end. Your rent is going to increase so you have to pay attention to anything that you agree upon. If you agree to a 10% increase in rent, you need to calculate that out and ask yourself:

‘Is my rent payment going to outpace the growth of my business?’

You’ll also need to familiarize yourself with something called CAM or Common Area Maintenance. CAM also is a dollar amount that gets tied to your rent. The whole formula is your base rent plus your triple nets (CAM, Taxes, and Insurance) so your rent is more than just your base rent. If you don’t put a cap on CAM or somehow put a definitive percentage increase that they can not go beyond, you could see your CAM climb exponentially to the point where it outpaces the growth of your business.

Relocation

The next point of a lease is the relocation. Every Shopping Center  is owned by somebody and they’re going to hold the right to relocate your business. Whether they ever do or not really isn’t the issue. The Landlord will hold the right to relocate you and that right will be passed on even if they sell the Center. You can’t deny them the ability to relocate you in the event that they need to. So you really need to pay attention to what’s important to you regarding your concept and your business and where it sits in that Center. Negotiate your lease to ensure that in the event of a relocation, the same circumstances that brought you to that particular spot in that Center are duplicated in the event of relocation.

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Default

We could spend a day on Default clauses and the different rules and regulations of the center. There are several different types of defaults. There’s monetary default, which is what happens if you’re late with your rent.  Defaults are very, very important because a landlord has what they call ‘the ability to cure’ the default. Some of the cures can be as severe as them voiding the lease itself and kicking you out of the property. So really understand the default clause and pay attention to items associated with cure.

Personal Guaranty

Personal guaranty and that’s exactly what it sounds like. Even if you sign the lease as a corporation, unless you are a huge organization, the Landlord will ask for a personal guaranty. A savvy Landlord will not accept a shell corporation as a signatory on a guaranty. A newly formed shell corporation has no assets and would defeat the purpose for having a guaranty at all.

Typically in the lease, there is a whole section, or Exhibit dedicated towards the personal guaranty. It explains what the Landlord can do if you default in this lease. Typically a personal guaranty gives the Landlord the right to go after your personal assets. From your home, to your car, and whatever else the Landlord can claim against any outstanding balloon payment required. Again, a lot of attention needs to be paid on this particular part. It’s very severe.

Exclusivity

Is your franchise or business the only concept in  the Shopping Center that’s allowed to sell hamburgers or whatever it is that you’re selling/doing? Exclusivity is something you’re going to have to ask for from the Landlord in the lease. If you don’t, you’ll be in there and somebody else will open a business that’s right next door doing the same thing you’re doing. At least close enough that it could put your business model in jeopardy.

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We are not attorneys and do not give law advice. You should seek the counsel of a real estate attorney before signing any contracts including your lease agreement. This article is not legal advice.