What do franchisees need to know about leases?

What do franchisees need to know about leases?

by | Mar 29, 2019 | Blog, For Franchisees

What do franchisees need to know about real estate? What do franchisees need to know about leases? Plenty.


I have found the perfect spot to locate my franchise. Now what?
You’ve bought a franchise. You attended the franchisor’s training. And now you have located what you believe will be the perfect location for your business.

You are committed. The landlord has presented you with a lease for your new space. Now what? Here’s where things can get tricky.

Did you know you may need the franchisor’s approval to sign the lease?
In addition to locating your dream spot and negotiating the terms of your lease with your new potential landlord, your franchisor may have the right to approve your lease and also may have the right to require you add certain provisions to that lease.
 
So, as a franchisee AND a tenant, you may find yourself negotiating TWO different agreements. What should you keep in mind?
 

  1. Length of occupancy. Make sure your franchise agreement and the lease end at the same time. Otherwise, should your franchise agreement end before your lease expires, you will find yourself still paying rent (and contractually obligated to pay that rent) on that space even though you no longer have the right to operate the franchise it once housed.  Alternatively, if the lease ends before your franchise agreement, you will be obligated to operate a franchise for which you have no location.
  1. Confirm that the space will accommodate ALL your needs. Make sure your lease permits you not just to operate your current franchise and offer the products and services that you can identify now, but those products and services the franchisor may require you to market in the future. Franchise systems evolve over time. For example, your current franchise primarily offers haircuts for kids. But over time, the franchise system expands its (and your) offerings to include haircuts for adults.  If your permitted use under the lease is limited to a kids’ salon, you may not be able to add the new services required by your franchisor.  Worse yet, failure to do so may be a breach of your franchise agreement. So, ensure your lease permits you the right to sell all current AND future products and services as required by your franchisor.
  1. Who gets your lease assignment? Most franchisors will require specific language that franchisees must include in their lease. This often includes language relating to assignment, notice and a franchisor’s right to inspect the location in the event that the franchise agreement is terminated. In the event of your default, for example, many franchisors will want the right to take an assignment of the lease. This permits the franchisor to protect the location and to continue to operate the franchise in the same spot without interruption.  At the same time, while your franchisor wants the right to take over your lease and your space, your franchisor will likely not want to have to pay any past due rent. This is often a sticking point with landlords who may object to this concept entirely, asserting that only they can decide to whom you may assign your lease. At a minimum, landlords often want to ensure that anyone who does take over your lease (i.e., the franchisor), must pay any back rent before approving any lease assignment.

 
Sound complicated? It is…a little. But none of the issues need be insurmountable. They just must be considered and addressed before you can secure a lease for your franchise location. 
 
Bottom line: if you are acquiring a location for the operation of your franchise, engage an attorney knowledgeable in both franchising and leasing to assist you with the negotiation of your lease. Got questions? Feel free to email them to me, Julie Lusthaus, at jl@lusthauslawpc.com  and let’s talk.

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