Debunking Lease Renewal Myths for Franchise Tenants

Dale Willerton and Jeff Grandfield

Date

Oct 27, 2015

Readers of our book, Negotiating Commercial Leases & Renewals For Dummies, will learn (in-part) that approximately two million business owners (including many franchisees) in North America negotiate a lease renewal for their location each year. Many tenants make costly mistakes on their first lease agreement, and if they’re not careful, may continue to pay the price for those mistakes in their lease-renewal term.

Prior to negotiating a lease renewal, a franchise tenant must understand and debunk a number of lease renewal myths. Considering that the average franchise tenant only negotiates a couple of leases in their lifetime (and sometimes with the same landlord), it’s easy to see how such myths persist. Occasionally, these myths are created and propagated by the landlord and/or the real estate professionals looking to serve their own interests. Here a few of those myths to keep in mind:

You must exercise your renewal option to extend your lease: Ninety-eight percent of the successful lease-renewal deals that The Lease Coach completes for tenants don’t include exercising the renewal-option clause. If they did, everything except the rental rate would have been off the table for negotiation. Your renewal option, if you have one, must be viewed as a safety net or back-up plan. Additionally, all your negotiations on a renewal term should be done well in advance of your current lease term expiring. If the landlord is unwilling to negotiate with you or you’re unable to achieve the desired terms, that’s when you consider exercising your renewal option. If you play your lease-renewal cards in the right order, you may be able to negotiate all kinds of inducements and changes that you were not aware of when you signed your first lease agreement.

Rental rates can only go up: We hear this all the time from tenants; “The landlord wants a rent increase on my lease-renewal term.” Of course the landlord wants a rent increase, but that doesn’t necessarily mean they are going to get it. One important factor to consider is the Consumer Price Index (CPI) or inflation. The inflation rate differs for various cities, and sometimes the economy is in a period of recession. It’s unfortunate that so many tenants who negotiated their own lease renewal and avoid a rent increase think they’ve won the battle, when a rent decrease was achievable if they knew how to negotiate.

Landlords won’t provide inducements on renewals: Typically, inducements, or leasing incentives, include free rent, tenant allowance, and landlord’s work to the premises. These inducements are commonly offered to tenants on their initial lease agreements and many of these same tenants are shocked to learn that (in most cases) such inducements are also potentially available on their lease-renewal terms. Although it’s true that most landlords tend to take their existing tenants for granted, it can be argued that any inducements the landlord is willing to pay to acquire a new tenant can also be offered and available to existing tenants on their renewals as the existing tenant is the landlord’s proven, long-term customer. Sure, a landlord can take a risk on a new tenant, but why wouldn’t they provide incentives to keep their existing tenants who already have a rent-paying track record? Of course, you know how to ask for incentives to get them; the landlord won’t simply offer them to you out of goodwill.

Next year will be better than last year: We don’t know why, but many franchisees seem to think that next year is always going to be better than last year. In many cases, your problem isn’t that your rent is too high, but that sales are too low for your location. If you don’t change your location, your product, your staff, your marketing, your pricing, or whatever your real problem is, there’s no reason to think that next year will be better than last year. This type of false optimism often wastes many years in the life of a business owner. The franchise industry is a good case in point regarding the need to change locations. If a franchise system has 400 units with the same brand, the same product, the same price, and the same service system, the single most distinguishable difference is location between the top and bottom performers. Therefore, if a franchise tenant isn’t willing to change location, business may probably be much the same next year as it was last year.


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