from Dale Willerton and Jeff Grandfiel, Commercial Lease Consultants, The Lease Coach.
Whenever we speak at major franchise shows there are always plenty of attendees at our leasing seminars and workshops. The majority of these are future franchisees who are virgin tenants.
Not only are they faced with selecting a great franchise system, they are entering into unfamiliar waters with regards to commercial leasing. Many have never negotiated a lease and do not always know what to expect. Before looking for suitable spaces to lease, ask these questions of your franchisor:
1. Will the franchisor sign the Head Lease and sublet the space to the franchisee – or will it be the franchisee alone who signs the lease?
Whichever party signs the Head Lease will assume the responsibility for the lease. Most franchisors want to avoid liability if the franchisee fails; therefore, “Don’t assume that just because you buy into a franchise system there will be a location or landlord waiting to take you in.” more often than not, the franchisee solely signs the Head Lease. Ideally, the franchisee would want to sign the Head Lease to retain as much control as possible. As a subtenant to the franchisor, the franchisee would be 100% responsible, along with the franchisor, so why not sign the Head Lease yourself? There is no extra protection or benefit for a franchisee to sublease from a franchisor.
2. What role(s) will the franchisor and franchisee play in the site selection and leasing process?
One reason so many franchisees get upset with their franchisor is the lack of defined roles each party will play in the process. Some franchisors truly provide next to no real estate/leasing help at all. Alternatively, they may shovel the process off to a real estate agent who may care more about his/her commission than your long-term viability. Defining the role of each party is a good approach;doing this in advance will create a better end result for both parties.
3. Will a real estate agent or broker be involved in the leasing process?
There are most commonly two types of agents – the listing or inside agent and the outside agent. The listing agent has his/ her “For Lease” sign on the building and works for the landlord to get the best deal possible (the highest rent, most deposit etc). The outside agent (an individual or real estate company hired by a tenant but being paid by a landlord) may or may not be working in the tenant’s best interest. Some franchisors may match their franchisees up with local brokers who find a location and do the deal but ultimately get handsomely rewarded with a commission check from the landlord. One franchisee asked us why the agent was only showing her the agent’s own listings. We explained that the agent would earn a full commission or fee and not have to split it with other agents if she leased his listing. Some franchisees think it is naïve of them to expect the landlordpaid agent to represent the tenant too – who can serve two masters?
4. Will the franchisee have final control or say over the location and lease terms?
Most franchisors will defer to a franchisee’s wishes when it comes to choosing between two or three sites for lease. But did you ever stop to confirm that you, the franchisee, have that right? The argument may not be even picking the best site – it might be you trying to avoid a location you hate because the franchisor insists that you lease there. The franchisee is the one taking the risk, signing the lease and paying the rent – make sure you have the power of veto when it comes to site selection.
5. What if we can’t find a good location or reasonable lease deal?
When we finished speaking at the franchise show in Washington, DC we met a young couple who had just signed up for a franchise and knew several plazas in their community that would be perfect for their concept. They wanted us to negotiate one of these locations to a completed lease. Unfortunately, all of these plazas were achieving rental rates 25-30% above the franchisor’s maximum recommended rental rate. These potential franchisees finally gave up and forfeited their franchise fees because the right space at the right price was not available. Don’t assume that just because you buy into a franchise system there will be a location or landlord waiting to take you in.
For a free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail DaleWillerton@TheLeaseCoach.com.