Business / Commercial

Leasing Tips for Franchisors

At Brookfields our franchise lawyers are regularly asked to review leases on behalf of our clients who are proposing to purchase a franchise business.  The lease will contain significant long term obligations on the franchisee which can last after the have sold the franchise business.  A franchise lawyer will look very carefully at the terms of the lease and the implications for their client.  A badly negotiated lease can make it extremely difficult to sell a franchise and can affect the long term profitability of the franchise business. 

By understanding what a franchise lawyer looks at when reviewing a lease franchisors can tailor their lease negotiations to address these issues where possible. Brookfield's franchise lawyers have prepared this guide to help franchisors understand the issue which they consider when reviewing leases. 

This guide contains a list of some of the issues which a franchise lawyer will consider when reviewing a lease.  However, it is not meant to be a definitive list of all of the issues a franchise lawyer will look at.  There are of course other issues which Brookfields' franchise lawyers will look at depending on the individual circumstances of our franchisee client, the franchise system and the premises. 

Brookfields' franchise lawyers recommend that franchisors develop their own checklist which they use when negotiating lease terms. Or even better have a set clauses ready to form part of the Lease or the Agreement to Lease.

  1. The term – a franchise lawyer prefers a term which matches the term of the franchise agreement.  It is not ideal to have a situation where the term of the lease is greater than the term of the franchise agreement or vice versa.  The franchisee could be left with obligations under a franchise agreement but no premises or lease obligations but no right to operating the franchise in.  In general a shorter initial term with multiple rights of renewal, is preferable.
  2. Renewal Rights – what rights of renewal are there?  Are there any special conditions which must be met e.g. premises refurbishment?  It is best if refurbishment obligations are waived if the premises meets the current requirements of the franchisor.
  3. Landlord Contribution – is the landlord making a monetary contribution?  If so it is likely that this will be considered income in the hands of the tenant and therefore taxable.  A gross up clause (where the landlord is required to increase the payment by the amount of any tax payable) should be included.  The agreement to lease or the contribution deed should be clear on what needs to happen for payment of the contribution and when it needs to be paid back (ideally there should be no requirement to pay back at all).
  4. Landlord/Tenant Works – Is the agreement to lease very clear as to exactly what works will be completed by the tenant or landlord and by when?  What landlord works must be completed before the tenant's fit out period commences and what are the consequences if that doesn't happen?  Postponement of commencement date by a commensurate period should be agreed.
  5. Use of the Premises – this should be kept as wide a possible to enable the lease to be assigned without having to go back to the landlord for approval if there is a change of use (for instance if the premises are no longer being operated as the franchise business).
  6. Rent – is the rental reasonable in the current market? Is there any percentage rent payable?  Is the amount reasonable? When is the rent reviewed and how?  Is there a hard ratchet or soft ratchet? A soft ratchet is preferred or even better no ratchet clause.  Is there a rent free period? Fit out period?
  7. Commencement Date – what triggers the commencement date?  If there is more than one tenant in the development then a franchise lawyer likes to see a clause which provides that the lease does not commence until after the majority of the development is tenanted or where there is major tenant – not until that major tenant commences trading.  Or until the entire development works are completed.
  8. Outgoings – what are the current outgoings of the premises?  A franchise lawyer is likely to request a breakdown of these expenses so that their client knows exactly what costs they are up for.
  9. Premises  – what is the current state of the premises? Is the building structurally sound and are there any issues with any building services – e.g. air conditioning etc.?  Is there a current building warrant of fitness in place?
  10. Refurbishment and redecorating – what are the tenant's obligations in relation to any refurbishment or redecorating obligations?  For instance, are there any upcoming refurbishment obligations?  If so, what is the likely cost of these?  The best scenario is that the landlord agrees that no refurbishment is required while the tenant operates the franchise business from the premises and complies with the current branding requirements of that franchise.  Consider including a provision which states that the landlord consent is not required for any redecoration required by the franchisor as a result of updating the branding.
  11. Reinstatement obligations – What are the tenant's reinstatement obligations on the expiry or termination of the lease?  What are the likely costs involved?  Minimising these as much as possible is a definite advantage given reinstatement can be expensive cost to the Tenant.  Is there a clear record of current conditions so reinstatement obligations can be  easily determined.  Or even better having a clear statement of what exactly will be required – e.g. back to base build.
  12. Trading Hours – if required is their flexibility to trade outside usual trading hours.  If trading outside these hours in a multi unit tenancy what are the provisions regarding air-conditioning, security and access.
  13. Signage Rights – does the lease provide for automatic signage rights so landlord approval is not required for any changes?
  14. Car parking – what rights does the tenant have in relation to any car parks?  Does the tenant have exclusive or shared car parking?
  15. Damage and destruction – The landlord's rights and obligations when the premises are either partly or totally destroyed have taken on a new significance since the Christchurch earthquakes.  What are the tenant's options if the premises are partly or totally destroyed?  At what point are they able to cancel the lease?  Are there timeframes during which the landlord must repair or reinstate the premises?  Ideally the tenant should have a right to cancel if they are unable to use or access the premises for a certain amount of time or if the premises cannot be reinstated to the same size and standard.
  16. Seismic Performance – if the premises are in an area with increased earthquake risk – is the landlord giving any warranty the building is a certain % of the NBS (New Building Standard)? What happens if there is a breach of this warranty?  What is the building's seismic performance?
  17. Redecoration – Most franchisee systems require their franchisees to redecorate their premises from time to time.  Consider including a provision which states that landlord consent is not required for any redecoration required by the franchisor as a result of updating branding.
  18. Relocation – in many mall or shopping centre leases there is usually a provision which requires the tenant to relocate its premises if the landlord is undergoing a refurbishment of the centre.  Is there an  impending refurbishment and what compensation will be offered?
  19. Guarantee – if a personal guarantee is required by the landlord then where possible the guarantee should be limited (whether in terms of the time period during which the guarantee applies or the amount of the guarantee). At the very least the guarantee should be removed on assignment and provision of a replacement guarantee.
  20. Bank guarantees – if the landlord requires a bank guarantee this should be instead of and not in addition to a personal guarantee.  The amount of the bank guarantee should be reasonable and there should be a requirement that the bank guarantee is released back to the franchisee on assignment and provision of a replacement bank guarantee by the Tenant.
  21. Assignment – what rights does the tenant have to assign the lease and what conditions must they meet to be able to assign the premises?  The best scenario is that landlord consent to an assignment is not required if the assignee is a franchisee of the same system as the existing tenant.
  22. Exclusivity - if the development consists of a number of tenants then it is preferable that there is an exclusivity clause which prohibits another tenant operating a competing business.  There are number of ways to do this, one option is for the lease to include a clause which prohibits other tenants in the development from operating a competing business.
  23. Costs –  A landlord should cover its own costs associated with entry into the lease, any rent review and renewal.

If you would like help tailoring a checklist which will help you with your lease negotiations please contact Lizandra Bailey

Your key contact

Business, Property & Finance

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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