Top 10 Tips for Franchisees Looking Into Leases
Top 10 Tips for Franchisees Looking Into Leases

If you are buying a retail franchise business, the lease is a critical element.

Leases can be held in the name of the franchisor or the franchisee as tenant. Whether you or your franchisor is negotiating a new lease with the landlord, or you are taking over an existing business and lease, there are basics you need to know beyond the usual commercial terms.

Just like the franchise agreement, the lease is a binding long-term commitment and needs to be treated with as much care and due diligence.

Here are the 10 questions to ask when reviewing a lease:

1. Is the lease term long enough?

It is important to have a lease term (or potential lease term with options) that is long enough to at least match the franchise term. Your bank will also want to see a lease term that allows you enough time to recover your/its investment. If you are buying an existing business and there is not enough lease term left, you may need to approach the landlord for an extension.

There is also a risk the lease may end early through demolition or relocation, if those clauses are in your lease or in the head lease, though the lease or the law may give you rights to compensation for your fitout or other expenses. If at all possible, demolition or relocation clauses should be removed or limited so you have a guarantee of an initial term of sufficient duration.

2. What is my right to occupy?

If the franchisor holds the head lease they need to grant you a sublease or a licence to occupy. Typically a retail lease prevents a tenant from subletting, licensing or “parting with possession” without landlord consent. So in that situation the head lease should allow a franchisee of the tenant to occupy the premises as sub-tenant or licensee.   

Failure to include this right in the lease will mean occupation by a franchisee without landlord consent is a breach of the lease.

Whether sub-lease or licence, it is usual for the franchisor to simply “pass through” its same obligations as tenant to the franchisee. It is therefore important to review the head lease - your right to occupy is based on this continuing. If you are to have exclusive access rights to areas outside the premises such as store room, parking bays or outdoor dining area, these rights need to be in the lease or in another licence agreement.

3. What does the lease disclosure statement say?

Every state and territory across Australia has different retail leasing legislation. In most places, tenants, including subtenants and licensees, must receive a lease disclosure statement from the landlord. This document includes important information about the lease such as outgoing obligations, redevelopment plans and details about the shopping centre if the shop is located in one.

Read through the disclosure statement. If it tells you building works are planned for the shopping centre, you may not be able to later claim any compensation if those works disrupt your business.

4. Can I transfer the lease if I sell my business?

Whether a lease is held by franchisor or franchisee, it should contain the right to assign (transfer) the lease (or the licence) to any approved franchisee or potential franchisee of the same franchise system without needing landlord consent (or at least the landlord should not be able to unreasonably withhold consent).  

In some states and territories there are also laws prohibiting retail landlords from refusing consent to a transfer in certain cases, which may protect you from being held liable for breaches after the transfer.

5. Are there any refurbishment obligations?

Franchisors and landlords may have separate refurbishment requirements, and making sure these are consistent is in everyone’s best interest.

Refurbishments - usually at the end of term or every five years - will typically be at the cost of the franchisee, and if a relocation occurs there will be extra fit-out costs.

6. What incentives or fit-out contributions are provided?

Landlords often provide fit-out contributions or lease incentives to their tenants. Franchisees of new sites should ask if a lease incentive has been received by the franchisor, particularly a contribution to the fit-out, and how this has been accounted for. Franchisors must disclose this in any event. If you breach the lease, then part or all of an incentive paid may be repayable to the landlord.

You should also advise your financing bank and your accountant if a fit-out contribution is received, as parts of the fit-out and fittings paid for by the landlord will belong to the landlord and not be available as security for a bank loan or for depreciation.

7. Is my permitted use broad enough for changes?

As a general rule, a broader usage favours the tenant. It is common for landlords to try to restrict food-court retailers in particular to a set menu, to avoid conflict between retailers and possible exclusive rights.

Rather than having a menu attached to the lease, it is preferable to have a usage such as “takeaway food outlet selling pizza, drinks and any other menu items of a Joe’s Pizza franchise”, which leaves it open for further items to be added without seeking landlord consent.

8. How much security or bank guarantee do I need?

Most leases will require financial security in the form of a bank guarantee for several months’ gross rent, and this is usually provided by the franchisee. Ensure you make your bank aware of the need for the bank guarantee as early as possible, as this is a common source of delay in securing access to the premises. You may also need to provide a personal guarantee for the lease obligations either directly to the landlord or to the franchisor.

9. What are a landlord’s insurance requirements?

The lease usually requires the tenant to take out certain insurances – public liability for a stated minimum amount and insurance of the tenant’s property are standard. Franchisors often require the insurance to be taken out by a franchisee, noting the interest of both landlord and franchisor. Do this early and obtain the certificates of currency for the landlord, or you will not be allowed to take occupation.

10. Are other expenses payable to the landlord on top of rent?

As well as the rent and outgoings there may be extra costs in a retail lease, particularly if the premises are in a large shopping centre. There are extra outgoings if you trade outside the shopping centre’s core hours, additional cleaning if you are in a food court, centre promotion contributions, charges for extra waste removal and amounts payable if you fail to open during the required hours. 

If you aware of these you may be able to take steps to avoid some charges being imposed.

If you have a query relating to any of the tips in this article, or you have a matter of your own that you would like to discuss - please don't hesitate to get in touch with Holman Webb's Property Group, or Franchising and Retail Group today.

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