5 Ways Franchisors Can Help Themselves By Helping Franchisees Avoid Costly Commercial Lease Mistakes

When I was in-house counsel with an international franchise system in the
mid to late 90’s, one of my first responsibilities was to review each lease
our franchisees were contemplating, to help them avoid costly mistakes.
Frankly, those mistakes, if made, can place both franchisee and franchisor
at risk.

Here are a few tips when negotiating those commercial leases:

1) In this economic climate, almost everything is open for negotiation.
Focus on key business points that will impact your bottom line.

2) Begin lease negotiation with a letter of intent.  Once the franchisee
reaches agreement on key points, they can move on to a form of lease.  This
will save valuable time and money (i.e. legal fees).

3) Make sure the franchisee understands the economics of the geographic
market.  Consult or collaborate with a real estate professional who can
guide them on market rates for commercial space.

4) Most landlords will look for a personal guaranty.  Franchisees should do
their best to limit any personal exposure and to make certain that such a
guaranty does not interfere with or undermine their banking relationship.

5) Exclusivity provisions, go-dark clauses, relocation clauses, renewal
terms, remedies upon default and damage/destruction clauses are all critical
terms of a commercial lease that can be overlooked once rent figures, term
and landlord/tenant improvements are hammered out – don’t lose sight of
them.

As with most business exercises, the most critical decision a business owner
will make is how to assemble his/her team.  Make sure you are working with
experienced professionals who will truly help them avoid risks that can have
significant consequences.

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Filed under Franchise Basics, Franchise Insight

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