Differentiating Between Good and Bad Leases
A bad lease agreement may hold you back from making a good profit or even result in the closure of your business. Great franchisees in poor or mediocre locations will never reach the full potential that a better location may offer. On the other hand, perhaps you’ve picked a great location, but leased too many (or too few) square feet; this can prove to be a problem as well.
Combine a poor location with a high rental rate and you have a recipe for disaster. Your franchise business will never succeed, let alone sell for a profit. Too many franchisees are shopping for cheap space, but for the most part, get what they pay for location-wise. This isn’t to downplay the need for skillful negotiation; you don’t want to pay too much for a good location – it’s all relative. In many of the larger plazas and enclosed malls, the property may be recognized as an excellent location, but getting stuck in a quiet area of the property may make your franchised business less visible than you would like.
Another factor can be a lack of adequate parking for your customers. One multi-unit restaurant tenant The Lease Coach worked with for a midterm rent reduction came to the unfortunate realization that their newest location was parking starved. Just when people were hungry and wanted to visit their restaurant, the parking lot was already full of vehicles. Customers parked briefly outside the front door, came in to complain that they couldn’t find a parking space even close by, cancelled their reservation, returned to their cars and drove away. Brevity in a lease agreement is the enemy of most franchisee tenants. A good lease agreement is longer, not shorter. Never assume that what the lease doesn’t say will play out to your benefit later – it won’t. As the franchisee tenant, you want everything that could possibly be an issue addressed in your lease agreement. Remember, it’s often what is missing from a lease agreement that really comes back to haunt the franchisee tenant.
While franchisor approval is typically required with choosing a location for a franchise concept, the franchisor often “rubber-stamps” the location without even visiting it (the franchisor may be located in another city and lacks the money, time, and/or qualified staff to do the work required). Don’t just assume that franchisors automatically know what they’re doing when it comes to choosing a site either. Often these locations are selected for the franchisee by an outside real estate agent who may see an easy commission with little work. Or perhaps the location was selected by an inexperienced franchisee or the franchisor’s area manager or developer based on some weak criteria. While name recognition will help to draw customers and build business, location is king. We remember a major submarine sandwich franchisee that opened near one of our homes. It was a bad location choice as the community didn’t need another plaza – let alone another quick-service restaurant in this particular neighbourhood. Sure enough, although this franchise chain had over 10,000 locations worldwide, this one opened and closed – within the first year.
Making a good lease great means removing, deleting, or negotiating restrictive clauses in the lease agreement that will hold your company back. For some franchisee tenants, the renewal-option clause can be the difference between whether you get to stay in your location for several renewal terms. A demolition clause can force you to move out of your premises if the landlord wants to knock down the building and put up another type of building. A relocation clause can force you into a costly relocation. If a franchisee wants to sell their business and assign their lease agreement to the buyer, the lease must have a comprehensive lease-assignment clause. However, commercial landlords often include conditions controlling or potentially prohibiting the lease assignment (unless suitable wording is added for the tenant’s protection). All of these are scary scenarios requiring proper guidance from a professional who is working for you, being paid by you, and serving your needs.