Lease Basics For Franchisees

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.

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5 Things You Should Include in a Letter of Intent

5 Things you Should Include in a Letter of Intent

Most franchisees and/or small business owners lease space for their business. In this post we’re going to cover 5 basic clauses to make sure are in your Letter of Intent. These clauses are important to negotiate up front in your Letter of Intent so that you don’t waste your time, resources, and give up your leverage negotiating them when you get to the Lease.

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WHEN TO SELL YOUR BUSINESS

by Steve Slowey

When is it time to sell your business? I can tell you the time NOT to sell your business is when you’re losing money. We’re going to make an assumption that your business is profitable, and that is definitely the best time to sell it.

I have a question for you. If you were to invest $1 million dollars and over a 4-year period, that million dollars was given back to you, and at the end of that 4-year period, you were given an additional $400,000, would you do it? If the answer’s yes, then I agree with you. I would do it too. Let’s talk about what I just said.

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Can I Walk Away from a Signed Lease?

By Tiffany Toliver

In the development world, the word ‘contingency’ has several meanings. The most common use for the word ‘contingency’ applies to construction budgets. A contractor will set aside a certain percentage of the cost of the entire project towards a contingency category. For example, if the construction cost of the project is estimated to be $1,000,000 then a contractor may set aside 10% of that or $100,000 for unforeseen circumstances.

Another use of the word ‘contingency’ is in regards to the LOI or lease language – that’s what I’ll be expanding upon in this post. A contingency, in this context, is a way for one party to be able to exit the deal if certain agreed-upon criteria are not met. For example, in a typical deal, I’ll always ask for a permit contingency. The language will go something like this:

                “Tenant’s obligations under the lease shall be contingent upon Tenants receiving all applicable building permits, licenses, and other documentation necessary to open and operate Tenant’s Permitted Use.”

A permitting contingency is the most basic of contingencies. It allows the tenant to walk away from a signed lease if he or she is unable to obtain a permit for their specific use. There are other contingencies that could be inserted into an LOI. Contingencies associated with the adequacy of public water or sewer, or permitted-use parking are very common. Usually, the Landlord or developer will counter a Tenant’s contingency with an expiration for which you, the Tenant have to complete your due diligence. They may give you 30 days, for example, to vet out for yourself whether there is water and sewer, or adequate parking. If a contingency expires, it is considered to have been automatically waived. Many times the landlord will hinge the contingency expiration time frame on the day that you execute the LOI. A more advantageous play is to hinge the time frame on the execution of the lease.

Another type of contingency found in the lease language is a financing contingency. If you are able to work this contingency into your lease you’ve won big. In today’s market many Landlords and Developers sneer at a financing contingency as it basically allows you to walk away if you cannot get financed from the bank.

Contingencies can go both ways. In the preceding paragraphs,  you read about the Tenant’s imposition of certain contingencies. Likewise, Landlords and Developers can have their own set of contingencies. For example, a landlord may make the lease contingent upon the review of tenant’s financials or the recapture of the premises from an existing Tenant.

Any and all contingencies should be negotiated in the letter of intent as they are an integral piece of the project timeline and a measure of risk on both the Tenant and the Landlord side. They allow a specified and agreed-upon timeframe to perform necessary due diligence.

 

 

How Dare You!?

Sometimes development can get heated. Blood pressures rise, adrenaline kicks in, ego comes out. Recently I was privy to one of these exchanges. The topic: a radius restriction.

“How dare you tell me that I can’t open another restaurant!?” Jason said. His face was visibly red. Jason tapped his class ring firmly on the table and waited for the Landlord to respond. He stared at the speakerphone waiting for the Landlords reply. “Jason, your lease with us clearly states there’s a radius restriction.” Alex said in a matter-of-fact tone. “You can’t build another {restaurant} that close to the one in our center.” Alex is the Landlord of a very successful lifestyle center in which Jason has an over-performing, and very popular restaurant. So popular, in fact, Jason has started looking for a site to open a second location. Jason’s pick for location number two is approximately 3.5 miles west of his opened restaurant. “Alex, this new site is over three miles away, there’s no way you can tell me that I can’t open another restaurant three miles away!” Jason said clearly frustrated by what Alex said. “Actually Jason, I can. It’s in your lease with us. Read the lease. There’s a radius restriction in your lease!”  Alex said sternly. The room and the speakerphone fell silent. Jason flipped through his lease to the section Alex had referenced in a previous email. “So you mean to tell me, that I can’t build anything within five miles?” Jason said testing the waters. “Yes”, Alex said. “Five miles, as the crow flies.” Uncomfortable silence ensued. Alex was the first to speak again. “This is tied to your percentage rent clause”.

So why do Landlords impose radius restrictions? Generally radius restrictions and percentage rent clauses show up to the party together. If the Landlord is banking on the collection of percentage rent, and will be sharing in your upside, a radius restriction will protect that collection from your own cannibalization. In dense trade areas, radius restrictions can inhibit your growth strategy. Before you agree to a radius restriction, make sure you map out the extents of the proposed radius so you understand the boundaries. If you’re part of a franchised organization, compare the radius the Landlord is proposing as a radius restriction, to your development boundaries outlined in your franchise agreement.

As with most items in your lease if you knowingly act in conflict, you could be placed in default. If you defy your radius restriction you might be liable for ‘damages’ or for any perceivable loss in the collection of percentage rent.

Related: http://www.franchisefrankness.com/blog/percentage-rent

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