How to terminate a franchise agreement
Although a franchisor will give you the tools,...
If you are planning to rent a space for your franchise, you will want to prepare yourself for lease negotiations with a commercial landlord (also known as the lessor). One of the most important steps you can take is to ask plenty of questions. By doing so, you will better protect yourself, your interest and your investment. The following are questions I recommend that you ask of the landlord’s property manager and prior to any negotiating being done:
1) Who is the Landlord? Will you be dealing with a large institution, a bank or a small independent “Mom and Pop” landlord? Depending on your opposition, you will be using a different negotiating approach or strategy. For instance, large institutional landlords are slower and often handle leasing matters through a board or committee – rather than one individual. For this reason, there may be some delay with the managing of tenancy issues. Furthermore, that large institutional landlord may be located in another city, and your dealings will be primarily by phone or e-mail. Smaller landlords are typically more local and more accessible – you can simply knock on their office door and ask personally and get an answer.
2) How long has the Landlord owned the property? In the commercial real estate industry, many landlords have been in business for more than 10 years. While there are “new” landlords, these are a rarity. Of those established landlords, there are several types including “holders” and “flippers”. Holders will keep the property long-term and work to increase its value, while flippers will resell the building for a profit within a short time. Not only will a long-time landlord be more stable to work with, he/she will have a wealth of knowledge and experience regarding the property, will be aware of the building’s history and what maintenance was necessary in the past, and will also know what will be required in the months ahead. A newer landlord who is primarily interested in short-term ownership will know less about the property. Typically, a long time landlord will also retain interest in continuing to own the property and have realistic rent expectations. Conversely, a new landlord may have a new high mortgage and may charge tenants higher-than-market rents to help cover that cost.
3) Where is the Landlord located? A local landlord is often more accessible, thus making it easier to deal with potential problems before and after signing the lease. One of my tenant clients was trying to meet with his landlord, a 70-year-old doctor who practiced part-time and took many holidays, so was often not around. Obviously, the tenant had problems scheduling a personal meeting. While franchisees can still rent from absentee or corporate landlords (or even landlords with a local address, but who are often absent), a local landlord is more likely to tend to his/her local properties first.
4) Is the person in charge of property management local? Similar to the preceding point regarding absentee landlords, ensure that the property manager is readily available to deal with any concerns you may have. Property managers may look after multiple sites, and if the sites are not all in the same town or city, the property manager may be out of town – and out of reach – when you need him. If the property manager lives out of town, I would hesitate to lease space in the building for fear of being neglected.
5) What is the building’s history? An older building may require significant upkeep and maintenance, which tenants (both franchise and independent) pay for in Common Area Maintenance (CAM) charges. The term of a new lease is typically five or 10 years. It may take another 10 years for your franchise to become profitable. Ask yourself if you are prepared to invest new money into an old building, or if the building is well-maintained.
6) Who is doing the leasing for the property? Landlords handle leasing in different manners; they may deal with the leasing themselves, hire in-house leasing staff, or turn the listing over to a real estate agent. Each party will have a different motivation for seeing the deal signed, plus each will be more or less knowledgeable about the property. You will get more complete answers from, say, the landlord’s son rather than a realtor who is trying to manage multiple listings. My advice? Franchisees should call the leasing rep that knows the most about the property and often knows the landlord personally.
7) Who were the two most recent tenants to move in and when? You may want to approach these tenants and ask them how their lease negotiations went. To find the newest tenants, ask the listing agent; if he/she claims to have only recently acquired the listing and does not the building’s history, push for details. The agent will have access to the landlord who can provide occupancy records for previous and recent tenants.
8) Who were the last two tenants to move out? The agent will be able to answer this question, but you may want to ask other tenants in the building for more facts. When and why did the formers tenants move out? For example, were they unhappy with the building and moved elsewhere? Did they close their business? If possible, speak to the former tenants and ask for their reasons for leaving as well as their opinions of the landlord. The Lease Coach is very successful in doing this because we search on-line for a company name and contact information.
9) Who is the property’s biggest tenant (the anchor tenant)? How secure is this anchor’s tenancy? The anchor tenant (or tenants, since there may be more than one) typically attracts the most traffic to a property so you will want to confirm that they will be staying. The agent you are dealing with will be able to confirm this for you. Tenants in a strip mall located near my home were caught unaware when a large supermarket chain (the anchor tenant) moved out. Despite having a long-term lease, an anchor can often move their business but continue to pay the rent, thus disallowing any competitor to move in and leaving the space vacant. You don’t have to take verbal representations at face value. If certain tenants or anchors are important to you, get it in writing on your Lease Agreement. Specifically, this will be a Vacancy Protection clause, inserted into the Lease Agreement, which anticipates the closure of an anchor business. Should the anchor close, move or terminate the lease, the Vacancy Protection clause gives you the right to either pay less rent or terminate your lease based on decreased traffic flow.
10) Is the building for sale? Due to the number of limited qualified buyers available, commercial buildings are not advertised for sale in the conventional way (with a conspicuous “For Sale” sign posted out front). Instead, commercial properties are offered to other landlords through a commercial property website. So, when you or your franchisor is conducting site selection, the question “Is the building listed for sale?” should be asked. Building owners looking to sell their building will have different motivations towards prospective tenants. Also, consider that you may like the current landlord but dislike the new landlord. If a new landlord is coming in, you may want to think twice about leasing space in a particular building.
You may feel uneasy asking these questions; however, landlords and property managers are typically open to providing answers. And, as a franchise tenant, you have every right to know.