Prospective franchisees understandably focus on the type of franchise they want to buy, one that hopefully aligns with their personal interests as well as offering opportunities for success. Many painstaking decisions must be made, and successful franchisees know that working with an experienced franchise attorney to review a franchise agreement is crucial to understanding their rights and risks.
Choosing and defining the territory for your business is also essential. Once you find the right location, it is equally as important to have a commercial lease attorney review and negotiate the legal terms of your lease agreement. Landlords logically want deals that favor their own interests. But accepting their terms without a comprehensive legal review can put your business and personal assets at risk.
The lease agreement can make or break your business
The first step in finding a location for your business is usually working with a real estate broker. Once you find a suitable property, the broker will help you negotiate specific business considerations, such as the lease’s term, square footage, minimum monthly rent, common area charges and possibly percentage rent, which is based upon your gross sales.
Franchisors will also likely review the lease to ensure that their interests are protected and that it meets their requirements. It is crucial to understand that the franchisor is only looking out for itself and not you. Most leases require that tenants personally guarantee that you will meet your rent obligations while limiting your options when challenges arise. The personal guaranty means that your personal assets (bank accounts, stocks, bonds, etc.) are backing the financial obligations under the lease of the tenant entity (LLC or corporation).
If you are located in a shopping center or mall, the landlord will also want to pass along extra charges, such as a pro-rated share of their operating expenses, including some taxes and insurance costs. But these contracts should never be considered boilerplate, and certain items can and should be excluded from the lease agreement. These include:
- The depreciation and amortization of the shopping center or mall
- Cost of repairs for damage caused by the landlord or another tenant
- Capital expenditures made by the landlord, such as repaving the parking lot
- Legal fees related to the lease agreement
- Taxes based on rental income for the shopping center
- Taxes based on the sale or purchase of the shopping center
In all, our firm has 28 items that we feel should be excluded from the charges passed through to a tenant as part of the common area charges in the lease agreement. Also, for specific landlord costs not excluded, we believe tenants should be able to negotiate a reasonable cap on allowable charges. We also fight for lease terms that include your right to review the landlord’s books and audit them when you believe errors have been made over what you’ve been charged.
The lease agreement should stipulate who is responsible for upkeep and repairs. The breakdown is typically designated as such:
- Landlords are usually responsible for major structural repairs, such as to the roof and facility-wide electrical and plumbing. They must also maintain common areas and ensure that the center complies with all codes.
- Tenants are typically responsible for anything within their own space, including plumbing and electrical. They must repair damaged plate glass and doors within their business as well as non-structural repairs. Tenants are also usually responsible for maintaining heating, ventilation and air conditioning systems or HVAC.
Gray areas often arise over plumbing or electrical repairs as pipes and circuits may run through several tenant locations. For instance, a pipe could burst inside your business, but the problem could have resulted from older, deteriorated plumbing throughout the shopping center. The lease should specify how these situations will be handled when repairs are needed. Here is another crucial note on the HVAC system. Make sure you have it checked thoroughly before signing the lease to gauge its condition. This is typically one of the costliest items you will face, and it is usually the tenant’s responsibility to maintain, repair and replace.
It is also crucial that you have the right to make any alterations necessary to the property during the lease to comply with the terms of your franchise agreement.
Indemnification from the landlord’s compliance failures
A commercial lease attorney can also protect you from liability for various legal concerns that should solely be the landlord’s responsibility. This includes indemnification for hazardous substances found in the shopping center, including your premises. Without this, you may be held responsible for the cleanup or costs associated with the cleanup of toxic substances. You should also be protected against lawsuits and fines due to the failure of the landlord to comply with laws, such as the Americans With Disabilities Act.
Considerations over the lease’s term
You should understand how you are affected initially by lease terms. But you also need to think ahead about what happens when your lease ends, and you want to renew, or you decide to sell your business before the lease ends and want to assign the lease. A common lease term is 10 years. Here are essential items to understand and define in the agreement:
- What date does the lease start, and when does it end?
- What is the date that rent commences (if different than the commencement date)?
- When will you receive a notice for the lease expiration and renewal? Six months before?
- What options are available for renewal?
- Do the initial term and renewal timeframe align with your franchise agreement terms?
- What will the rent renewal cost?
While no one can predict the future, it is generally a good idea to lock in a renewal rate based on current values rather than relying on the fair market value at the time of renewal.
Tenants are also strongly advised to negotiate the right to assign the lease in case things change and you decide to sell your franchise. If you sell to another franchisee or the franchisor, you should be able to assign the lease free of charge. Having the right to be released from any personal guarantees is crucial once you assign the lease to the business’s new owner. You definitely do not want to guaranty the financial obligations after you have sold the business.
Vital use provisions to include
The lease agreement should also address compliance with your franchise agreement and obtaining permits to make necessary alterations to the property. Examples of these clauses include:
- Ensuring that the permitted use clause includes everything you agree to sell as a franchisee.
- Stipulating that you have exclusive rights in the shopping center for your type of business, thereby prohibiting the landlord from leasing another space to a competitor, and putting penalties in place if that occurs, which may be a reduction in your rent.
- Getting landlord and local government approval for signage before the lease is signed.
- Having the right to terminate the agreement if you fail to receive government approval for signage after the lease is signed.
- Having the right to terminate the lease if you cannot receive governmental approval for permits within a specified time.
This final provision is also crucial when costs related to permitting approval make the buildout prohibitive.
Default by the tenant or landlord
If you do not comply with the terms of your lease agreement, it is essential to have a system in place to remedy the situation. These issues typically involve monetary defaults, including failing to pay rent on time, and non-monetary defaults, such as a deadline to repair a broken window. Monetary default notices are usually five to 10 days, and non-monetary default notices can run up to 30 days. If you breach the contract, landlords may be able to enforce these remedies:
- Terminate the lease
- Accelerate your rent, meaning you must immediately pay all rent for all months remaining of the term
- Remove or sell off your property
Likewise, if the landlord does not live up to their end of the bargain, it is crucial to have remedies in place for your benefit. If a structural issue isn’t addressed within the timeframe stipulated in the lease and your business is damaged, you should also have remedies to enforce. These can include:
- Withhold or reduce rent
- Implement repairs and invoice the landlord
- Terminate the lease
The agreement should outline a reasonable amount of time to address defaults and protect your interests.
Experienced legal guidance can ensure you are protected
Most landlords require personal guarantees, meaning your home and investments could be on the line in case of a default. Experienced lawyers understand numerous ways to limit your exposure, as well as relieve you of any further responsibility if you assign your lease to a new owner.
Your attorney will also painstakingly check the lease to ensure that all of the business terms included in the letter of intent that was negotiated for your benefit were transferred correctly to the final lease agreement.
It is also crucial that you have the right to make any alterations necessary to the property during the lease to comply with the terms of your franchise agreement. Attorneys specializing in commercial leases and franchise law understand the many complicated facets of becoming a franchisee and can reduce the risks while protecting your personal and professional assets.