Franchisee 101: Negotiating a Lease

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If you think signing a franchise agreement is hard on the nerves, wait till you have to talk with a landlord about a lease.

Why? Because the terms of your lease can spell success or failure as easily as your franchise agreement can, and in negotiating a lease you won't have the protection of state and federal franchise law to keep you from harm.

Put another way, next to the franchise agreement itself, your lease is the most important legal agreement you will sign as a fledglingfranchisee - and fraught with danger, since a bad lease can send you to the poorhouse in short order no matter how good a franchisee you are.

Which is not to say it's impossible to get things right with a lease so long as you understand that your landlord has the upper hand and it's up to you to look out for yourself.

Here are five things to look out for:

Condition of the premises: Most lease agreements require tenants to accept the premises "as is," meaning you have no recourse if, for example, you discover mold in the walls of your premises after you open up for business. To protect yourself, you want to make your lease contingent on the results of a professional inspection before you take possession. You also want the landlord to warrant that the premises conforms to all applicable building codes and such laws as the Americans with Disabilities Act.
Commencement Date for Payment of Rent: Most leases call for the payment of rent when the lease is signed or within a specified period of time after lease execution. Negotiate to defer the payment of rent until you open for business or as close to the scheduled opening date as possible.
Options to Extend Term and Expansion Rights: You expect to succeed, right? Obtain the right to extend the initial term of the lease for successive periods of time to coincide with your extension rights in your franchise agreement on the same terms and conditions originally included in your lease, with the exception of your rent, which will generally always increase. Success could also mean you'll need more room, so you want language in your lease giving you an option, or at least a right of first refusal, to lease adjacent space.
Options to Terminate Lease: You may fail, right? A possible, but not likely, way to protect yourself is to obtain an option to terminate the lease if your gross revenue does not exceed a designated amount within, say, the first 2 - 3 years of the lease term.
Covenant of quiet enjoyment: In essence, a covenant of quiet enjoyment guarantees that claims against your landlord - for example, a foreclosure action or a mechanic's lien - won't affect your lease. If you find a covenant of quiet enjoyment in the lease your landlord hands you, well and good. If not, insist on adding one.
Entire agreement: This is boilerplate in virtually any legal contract. Its importance is that it frees the landlord from living up to any promises made verbally but not included in the lease agreement. Put another way, nothing your landlord promises to do for you means a thing if it doesn't end up in the lease agreement.

Other pitfalls await the unwaryfledgling franchisee in negotiating a lease. We'll cover them in future newsletters.