Protecting Yourself with Commercial Lease Conditions – For Franchise Tenants
Readers of our book, Negotiating Commercial Leases & Renewals, will learn (in part) that leasing commercial space is only one of the necessary components for an independent business owner or franchisee.
You must also secure financing as well as bring all the other pieces of the puzzle together before you actually require the space for your business. In an offer to lease or letter of intent (LOI), both the tenant and the landlord include conditions that must be met in order for the deal to be consummated. For example, the landlord may make it a condition of the offer to lease that they’re satisfied with your credit score or financial statements.
For your own protection, you can include clauses as well. Here are just a few recommendations for you:
Franchisor approval: One of the many advantages of having a franchisor is that you have another set of eyes and ears to review various leasing opportunities. Not all franchisors will agree on which location constitutes the best place for your business. While franchisors, typically, simply “rubber stamp” a location for business, they may not give their blessing on a commercial site. In this case, you should have the right to rescind the offer to lease.
Business permits, including zoning: Franchisees are occasionally surprised to find that the property they want to lease isn’t zoned for their type of use. This often has to do with parking ratios and how much traffic a business is creating to a specific area. Therefore, it’s normal to make an offer to lease conditional upon getting a business permit, which, of course, is issued only if the zoning for the property is acceptable.
Construction estimates: If you qualified for a $200,000 loan, but the cost of renovating and improving the space far exceeds your initial budget, you may or may not be able to borrow more money. In some cases, the tenant is simply unwilling to borrow or put additional money into the project. One condition you can put into an offer to lease is final approval of all construction estimate quotes.
Financing: Although you may be confident with securing financing for your business, your banker may insist on viewing an executed lease agreement beforehand. Therefore, it’s perfectly normal to include a financing condition.
Inspection of the premises: What you see isn’t always what you get. A commercial property can be loaded with patent or latent defects (mold or termites for example). Just because you’ve negotiated a great deal doesn’t mean that you shouldn’t do a thorough inspection of the building – especially if it’s an older property. Most lease agreements state that the franchise tenant is accepting the property as is. We’ve seen many franchise tenants sign a lease agreement after visiting the property only once. We recommend returning and looking at it several times with partner, spouse, or building inspector.
Satisfaction with the formal lease agreement: A typical offer to lease or letter of intent is only a few pages in length. It’s quite possible that a landlord and franchise tenant cannot come to terms on certain sections or clauses within the formal lease agreement (which may be up to 50 pages in length). Even though the landlord and franchise tenant may have come together on the business terms, it’s quite acceptable for the franchise tenant to make their satisfaction of the formal lease agreement as a condition of the deal-making process.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your
request to DaleWillerton@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 1-800-738-92021-800-738-9202 FREE, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.