A large percentage of franchised businesses are operated from commercial premises; in most instances a third party landlord leases these directly to the franchisee. A franchisor may also take the lease which they then sublease to their franchisees.
New franchisees generally negotiate new agreements; in the case of existing franchises the franchisees may just take over existing leases.
Regardless of the rental structure followed, it’s eventually the franchise that’s obligated to make the payments. This is why all the terms and conditions of the lease need to be scrutinised carefully before you sign on the dotted line. It’s important to understand that as a franchisee, the lease obligations are exclusive of the obligations under your franchise agreement.
In most franchise networks, the franchisee is required to secure suitable premises to operate their business, under the franchise agreement. If you are planning on leasing a retail or commercial space there are certain aspects you would have to keep in view such as:
Check whether you have a gross lease (where the landlord pays all the outgoings except the consumables); or a net lease (in which you are required to pay the outgoings for that premises once you have leased it from the landlord.
In most instances the landlord is required to give you notice of any new rent amounts post a market rent review. As the tenant, you have the right to dispute that rent amount within a set timeframe. YOU need to pay special attention to terms such as “time is of the essence” in your rent review as they have legal bearing and you may end up forgoing your right to renewal if you fail to give the notice within the specific timeframe.
If you are purchasing an existing franchisee business that is operating out of leased premises, you become the assignee of that particular lease. In situations such as these, you need to very carefully consider what end of lease obligations the tenant has. Most leases also have terms which state that the premises have to be handed over to the landlord in the state it was in when it was leased out. If you are going to be assigned an existing lease, you would need to factor in the costs of de-fitting the premises and returning it to its original condition. These costs can amount to a lot and you need to be aware of this aspect.
You also need to make sure that the lease terms, as well as renewal options, are in line with the terms mentioned in your franchise agreement; or else you may just find yourself in a situation where the lease payment obligations continue even after the franchise term has ended or vice versa. If there are any kind of bank guarantee obligations or personal guarantees under that lease, they shouldn’t be carried forward beyond the term of that lease. They need to cease once the lease has expired.
There are a number of technicalities that come into the picture with reference to leases on franchise premises and you need to be aware of the different aspects while you look at your franchise lease. This will save you a significant amount of time, trouble and money in the long term.
If you want to know anything more about franchising or want some sound and professional advice, call The Franchise Institute on 1300 855 435 or fill in this contact us form and we’ll reply as soon as we can.
Thanks for reading,
The Franchise Institute Team
1300 855 435