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Franchise tenants typically pay a great deal of attention to marketing and managing their own companies; however, they often overlook the importance of their own commercial lease. The commercial lease, provided by the landlord, states the specifics of the agreed-upon lease (e.g. lease term, tenant inducements, monthly rent, etc.) and includes many additional clauses – many of which can – and should be – negotiated before the lease is signed.
By successful negotiation, the franchise tenant can often benefit in a good number of ways. Granted, the lease can often be dry reading; however, it can dictate the success or failure of a business so a tenant needs to pay close attention to this document. We have outlined a number of tips for first-time (and existing) franchise tenants to consider before signing their first lease (or their lease renewal) in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES, and summarized several of these below:
Allow Sufficient Time: For a new location lease agreement, get started six – nine months in advance to avoid unexpected situations and delays. Lease renewal negotiations should begin between nine and twelve months before the lease term expires. As an existing tenant, if you can’t get a decent renewal rate, would you rather find out you need to move with three weeks or six months left?
Never Just Accept the First Offer: Even if an Offer seems reasonable or you have no idea what to negotiate for, never accept the leasing agent’s first offer. More often than not, this first offer is inflated. Many agents use a strategy of starting negotiations at a higher rate that allows them to give in slightly. The Lease Coach frequently completes lease agreements at 15 to 25% less that the agent’s opening offer (in one case, we negotiated the asking rate down from $8.00 psf to under $3.00 psf).
Select the Best Lease Length: While a five-year lease term is still standard for many businesses (7 or 10 years in some cases), it may not necessarily be the best term for you and your company. Three years, or even one year, for some tenants may be better if the cost for leasehold improvements is low enough since these are generally amortized over the life of a lease term. The agent – motivated by a greater commission paid by the landlord – will want you to sign the longest term possible; however, the landlord may be more flexible. Take the lease term that is best for your business.
Who Should be the Tenant? Don’t enter into a lease agreement (or an Offer to Lease) under your personal name. This will make you personally liable for everything. Instead, form a corporation or a holding company that will become the tenant. If you are negotiating of various locations but don’t intend to incorporate until a later date, then your Offer to Lease should state that the tenant is Your Name on behalf of a company to be incorporated (or Nominee). If you are opening multiple locations, it is often wise to form a new company for each lease agreement as further protection. Furthermore, corporations also have more tax benefits than sole proprietorships.
You are the Customer: Far too often, franchise tenants act as if they are applying for a lease. Remember, you are the customer. If you want to be in the driver’s seat for the lease negotiations, you must remember who is serving whom. The tenant sets the meeting time. The landlord’s agent drops off and picks up documents to/from you and so on. Shrewd tenants never pick up the restaurant bill after having lunch out with the agent or landlord. You must never put yourself in the position of seller … instead, you must always appear to be the buyer … and the customer never pays for lunch.
Being prepared, persistent, and knowledgeable will, ultimately, benefit any commercial tenant looking at a first-time lease or a lease renewal. Furthermore, having everything prepared can help better ensure your own business success.
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 or visit www.TheLeaseCoach.com.