Site selection and lease negotiations are among the most
critical tasks facing a new franchisee. While the franchisor often
selects the site, the franchisee is typically required to accept
the choice, but bear the risk of doing so. Where the franchisee
selects the franchise site, they must often negotiate (or accept) a
complex lease or sublease.
Some of the key issues that any franchisee should consider when
dealing with franchise leases include:
i. Site selection:
You should always conduct your own franchise site due diligence.
Review traffic flows (pedestrian and automotive), inspect the site,
consider demographics and neighbouring stores, parking capacity,
and restrictive covenants (ie. the things you cannot do or offer
for sale within the store).
Will you lease your franchise location directly from the
landlord or sublease the premises through the franchisor? In the
latter case, the franchisor/landlord may be in a better position
than you would be on your own to obtain more favourable rent, lower
common area maintenance charges ("CAM"), and exclusivity
in the complex for your franchise business. You should note,
though, that some franchisors may "bump" the rent
somewhat in excess of their payments under the head lease. If you
lease directly, the franchisor will usually require you to give
them the option to assume your lease if you default under your
franchise agreement. As well, if there is a default, the franchisor
will not be there to "cover" you if you do not have funds
for rent or other payments.
Is rent under the initial and renewal terms at market rates?
What is the CAM? Are they at market? Is there a cap on annual CAM
and CAM increases? Is additional rent payable?
Ensure that the landlord has approved the franchise site design
plan. In terms of signage, be clear where signs will be located,
and what kind of sign(s) you must have, as internally-lit or
backlit "box" signs are more costly than other forms of
signage. Confirm with your landlord or the franchisor that rent is
not payable until the premises are completed.
v. Permitted Use:
Confirm whether the sale of certain products or services is
prohibited by the franchise lease, or whether you can get an
exclusive right to offer your wares/services.
Try to tie the length of the lease to that of your franchise
business agreement. Consider your risk if the franchise terminates
prior to the end of the lease/sublease.
What are the conditions of lease renewal, particularly in terms
of rent increases or renovation requirements? Is the option to
renew yours or the landlord's?
viii. Repair and Maintenance:
Ensure that you are not liable for any structural repairs or
maintenance expenses not related to the interior of your leased
Ensure that consent to an assignment of your lease cannot be
x. Default Provisions:
Are they reasonable? Do you have a reasonable right to cure
(remedy) any defaults?
The landlord should only have the right to relocate or terminate
you upon the occurrence of certain, narrow conditions. If there is
a right to relocate, make sure that the relocated premises are to
be substantially the same as the original premises. If the
franchise agreement is terminated, do you have the right to
maintain the lease, and if so, on what terms?
This is a brief list of franchise issues to consider, but a
franchisee should always consult qualified legal counsel prior to
entering into any franchise or lease agreement.
Previously published in BeTheBoss.ca
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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