Franchisees: 10 Essential Tips to Negotiate a Strong Commercial LeaseJune 28, 2018
Is property a fundamental part of your franchise? Perhaps you need to rent office, retail or restaurant space. Whatever your property needs, your commercial lease is a key part of building a successful business.
The lease is a legally-binding contract, between you and the landlord, which documents your rights and responsibilities as a commercial tenant. So it’s important to get it right.
Below, we offer our top tips to negotiate a strong lease that will help your franchise thrive:
1. Find out what support your franchisor offers
Before diving straight into lease negotiations, find out what support is available from your franchisor. Will they help you find suitable business premises? Do they have a dedicated team to manage your negotiations?
If your franchisor doesn’t have an in-house conveyancing team, they may recommend suppliers to help you instead. Their preferred suppliers will be familiar with what works well for other franchisees. Appoint a surveyor or agent to manage your lease negotiations and advise you on suitable rent levels.
2. Beware of Business Rates
Your lease includes details about the payments associated with your property, such as rent and service charges. It’s also important to be aware of the ‘business rates.’
Business rates are a tax applied to non-residential properties. These rates can add an average 40% to your rental costs (Property Industry Alliance, 2017). So, it’s vital to find out if you (or your franchisor) will pay the business rates for your property. This information should be in your franchise agreement.
You can sometimes get a discount on the business rates from your landlord so be sure to ask about this option. After all, if you don’t ask you don’t get!
3. Long vs Short Lease?
Lease length ranges from around four years to a whopping 25 years. So, how do you decide which length is best for you? Consider how the lease reflects your other commitments, such as the length of your franchise agreement. For example, it’s no good having a gym franchise for seven years but a four-year lease contract (or vise versa).
A short lease is now more common and usually better for tenants because it provides greater flexibility. Whereas, a long lease brings long-term liabilities; you may be held liable for the lease even if you sell the franchise or your franchise contract is terminated. This would leave you with an empty building and mounting costs, but no franchise.
4. Take a ‘Break Clause’
Break clauses are another increasingly common feature in commercial leases. And with good reason. This provision allows you (or the landlord) to end the lease early if needed. However, the terms and conditions vary and can make exercising this clause difficult. Seek legal advice to ensure the break clause benefits you and your business.
What could be better than a ‘break clause’? A tenant-only break clause, of course! Tenant-only break clauses allow only the tenant to end the lease early. This puts the power in your hands so it’s worth negotiating this tenant-friendly feature into your lease.
5. Understand Your Practical Responsibilities
The terms of your lease determine your rights and responsibilities to repairs. Some key terms to watch out for include:
- ‘Full repairing lease’ – You will be responsible for all repairs as they arise. Therefore, it’s worth requesting a ‘photographic schedule of condition’ to document the property’s state of repair at the start of your contract.
- ‘Keep in substantial repair’ – In this case, you are also obliged to fix any repair issues caused by the previous tenant or landlord.
Repairs can be a big financial drain so it’s a good idea to do your own survey. Before signing anything, visit the premises to check if the landlord’s promises match the reality.
6. Negotiate a ‘Rent Free Period’
A ‘rent-free period’ is a time during your tenancy (usually at the beginning) when you don’t have to pay any rent. This may sound too good to be true but it’s not! Commercial landlords offer rent-free periods for many reasons, including:
- As an incentive to attract tenants
- To cover the costs of repair work the tenant will need to do
- To cover the cost of required fit-outs to make the building ‘business ready’
It’s worth negotiating for a rent-free period. After all, the best things in life are free!
7. Is Planning Permission Needed?
Imagine signing a lease on your dream property, only to discover you can’t make the alterations you wish, due to planning restrictions. Lengthy planning issues can delay or completely derail your business plans. Avoid this fate by investigating what permission is needed before signing the lease.
There are many reasons for planning restrictions including, the property’s purpose, location or listed-building status. Planning permission will usually be required for any alternations or change of use. A conveyancing expert, such as your surveyor or lawyer, can do searches and advise you on planning requirements.
8. Rent Deposit vs Guarantee
Beware any landlords who ask you for both a rent deposit and personal guarantee – This isn’t the norm and it’s not a legal requirement. It should be a case of you providing either/or (or neither!). From the tenant’s perspective, it’s preferable to pay a rent deposit over a personal guarantee, so factor this request into your negotiations.
9. Mind Your ‘Head of Terms’
The ‘Head of Terms’ documents the agreed principles which all parties (landlord & tenant) wish to be reflected in the final lease contract. It’s important to get this right as it can be difficult to change the terms once they are set out. Get the agreed terms in writing and be sure to get them reviewed by your lawyer before agreeing to proceed.
10. Seek Legal Advice
This is paramount to your success. Hire a commercial property lawyer to review your lease before you sign anything. It’s worth appointing your lawyer at the beginning of the negotiation process. This way, you can seek their legal advice on the points mentioned above. Having legal experts on your side helps you avoid risks and financial loss later.
Get in touch, to speak to one of our commercial property experts today. Our team is always ready to help you.
Who Are We?
Goldstein Legal is a niche, law firm specialising in commercial property & franchising law. Our friendly team of expert lawyers works hard to understand you and your business. We offer no-nonsense, jargon-free advice and tailor our services to meet your commercial needs.
We take the stress out of your property transactions.
Our Commercial Property Services
We provide legal support to commercial tenants and landlords.
Securing a strong commercial lease can be a complex and difficult process. This is where quality legal advice really counts. We use our expertise to achieve lease terms that suit your objectives and priorities. We can support you throughout the negotiations and provide essential legal services, including:
- Negotiating and reviewing the ‘Head of Terms’
- Reviewing your commercial lease contract.
Our services don’t end once the lease is signed. We can also support you with:
- Negotiating lease renewals or terminations
- Transfer of property interests for franchise resales
- Exercising your right to use break clauses
- Advising on your rights and responsibilities throughout the tenancy
- Resolving landlord/tenant disputes
Whatever your needs, our commercial property experts will be on hand to advise and support you. Your success is our success.
Get in touch for a free initial consultation with one of our commercial property experts today.