Dealing with Renovations and Construction for Franchise Tenants

Prospective and new franchisees shouldn’t just stop at signing their initial commercial lease … they should start thinking ahead to their commercial lease renewal. One of the best times to address any construction and/or renovation plans (even something as simple as new carpeting or a fresh coat of paint) is prior to your lease renewal date. Your landlord may be willing to cover the costs of these repairs or upgrades to your store as a means to motivate you to renew your lease and remain in his property as a rent-paying tenant.

As explained in our book, Negotiating Commercial Leases & Renewals FOR DUMMIES, there is more to consider and remember. Before completing any renovations or repairs to the property yourself, it’s vital for franchise tenants to understand that landlords often reserve the right to pre-approve all design and construction to be done by the tenant for a couple of reasons:

  • It is often the landlord's tenant allowance money being spent on those leasehold improvements. The landlord wants to ensure if at all possible that the improvements being made to the premises can live on and be used by the next tenant should you not stay for more than one lease term or your business fails.

  • It is the landlord’s property and the landlord rightfully deserves to know whether your construction plans include penetrating a roof membrane or other structural changes. If your design plans reveal that you’ll be using a disproportionate amount of utilities, the landlord may also want some input on that (which is completely understandable).

In some cases, your lease agreement may include a review fee for looking at and approving the tenant’s plans, which will include renovations throughout the lease term. As with many other terms and conditions in this agreement, this fee is completely negotiable as part of a lease renewal. With one client, we remember that the landlord was trying to charge the tenant $1,500 to review their renovation plans … The Lease Coach negotiated to eliminate this expense entirely as this was not a brand-new buildout and the plans were mostly cosmetic in nature.

We strongly advise that franchise tenants clarify the landlord’s work to be done. The landlord’s work, as listed in any agreement, should state very specifically any improvements that the landlord will do to the property – typically at the landlord’s expense. Commercial tenants may choose to replace or upgrade their store flooring. In this case, the tenant should choose the preferred color and grade of flooring otherwise the landlord may simply install the cheapest and lowest-quality flooring available as a cost-cutting measure. No matter what the upgrade or renovation project desired or planned, it is critical for the tenant to include as many details as possible to avoid future disagreements and unforeseen costs. Do not make assumptions on these details.

Any work that the landlord isn't doing will be stated as tenant's work. While you will still require the landlord's approval to complete these projects, this work is at your expense. With more extensive renovations, the landlord's and tenant's work is, typically, listed in a separate exhibit attached to the agreement.

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