Finalizing the Formal Lease Agreement – For Franchise Tenants
Once you’ve completed the offer to lease or letter of intent (LOI), it’s time to take the final step – signing the formal lease agreement. An offer to lease is sometimes called the short form lease document and the formal lease agreement is sometimes called the long form lease document. Occasionally, a landlord may create only one lease agreement.
As tedious as it may seem, read everything in the formal lease – even if the clause title seems very straightforward. Landlords may go off-topic in various clauses and include unrelated points you may never realize were signing off on unless you read the entire clause. This is why many lease agreements state that the clause headings are not part of the actual agreement – these headings are simply for ease of information access. Lease agreements can include a table of contents page which can often be helpful.
You should avoid reviewing the formal agreement before signing the offer to lease. The more time that you invest in the deal-making process, the more likely that you are to move forward and the landlord knows this. If the landlord can prompt you to start making comments on the formal lease agreement before the offer to lease is finalized, this sends a very strong buying signal to the landlord – this can work against you in the offer to lease negotiations.
When reviewing the formal lease agreement, you may want to make the following changes:
Ensuring that there are no “blanks”: All the terms in the offer to lease will need to be included in the formal lease agreement. Ensure that all exhibits, schedules, or items to be further defined are included. Provided parking stalls and your company’s signage must also be clearly defined. Pictures can really help.
Adding to clauses: You can often soften a clause by adding wording. If landlord consent is required for the tenant to put up new signage or to change the business name and then adding the words “landlord consent not to be reasonably withheld” can make all the difference in the world.
Removing or deleting clauses: If a formal lease agreement includes a percentage rent clause that you’re not required to pay, deleting that clause makes sense.
Amending clauses: One example of these is when the formal lease clause states the tenant has to give nine months’ notice if he/she wants to exercise a renewal option clause and the tenant changes it to six months’ notice instead. In this case, the clause remains intact.
Negotiating for lease step-down clauses: You can replace an overbearing lease clause with a step-down clause that’s less restrictive or punitive. An example of this may be the requirement for a personal guaranty on the Lease being reduced from a full guaranty to one limited on the maximum dollar value or time it is required. Many sophisticated landlords have pre-prepared step-down clauses that they can use to replace other overbearing clauses – with the tenant’s objection or request.
If you can’t come to an agreement on the terms and conditions of the formal lease agreement, the deal may fall apart. This is rare; however, it does happen occasionally. There are rules to follow, and if you’ve already paid your deposit, then you will want to make sure that you get your deposit returned. Once the landlord sees that you’re serious about walking away, he/she may come around to your line of thinking and give you want you want. Real estate agents who are holding your deposit in trust need to be talked to as well to ensure that you’re refunded any deposit already paid.
A formal lease agreement is a contract – expect to jump through some hoops to get it signed, sealed, and delivered. Landlords typically have some formal procedure that you must go through in order to complete the agreement. The landlord normally provides you with three, four, or five original documents for your signature. One copy comes back to you with the landlord’s signature, one copy is sent to the local property manager, and the remaining copy/copies are kept with the landlord.
You will also likely need a witness to sign the documents or the landlord may stipulate that you must sign the agreement in front of a notary public or a commissioner of oaths. This typically costs less than $100.00. Using a notary public or a commissioner of oaths certifies that you – or your official representative – have actually signed the document. In some cases, you may choose to use a corporate seal as well.
Once you sign and return the formal lease documents to the landlord, there still can be a delay. You can’t assume the deal is done until you’re holding a landlord / tenant-executed original agreement in your hands – and that can take weeks. In order to avoid delays in the construction process, continue to correspond with the landlord and get that landlord-executed agreement back to fully consummate the deal.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com / JeffGrandfield@TheLeaseCoach.com or visit www.TheLeaseCoach.com.
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