With the Chartered Professional Accountants of Canada...
If you are planning to rent a space for your franchise, you will want to prepare yourself for lease negotiations with a commercial landlord (also known as the lessor) or his/her agent. One of the most important steps you can take is to ask plenty of questions. By doing so, you will better protect yourself, your interest and your investment. I recommend that you ask the following questions during the negotiating process:
1) Who is the Landlord? Will you be dealing with a large institution, a bank or a small independent “Mom and Pop” landlord? Depending on your opposition, you will be using a different negotiating approach or strategy. For instance, large institutional landlords often handle leasing matters through a board of directors – not one individual making decisions. Therefore, there may be some delay with the managing of tenancy issues. Smaller landlords are typically more local and more accessible.
2) How long has the Landlord owned the property? In commercial real estate, note there are both new and established landlords. Established landlords can be either “holders” or “flippers”. Holders will keep the property long-term and work to increase its value, while flippers will resell the building for a profit within a short time. Long-term landlords are more stable to work with and more knowledgeable about the property’s history and any required maintenance issues. A newer landlord who is primarily interested in short-term ownership will know less about the property.
3) Where is the Landlord located? A local landlord is often more accessible, thus making it easier to deal with potential problems before and after signing the lease. While franchisees can still rent from absentee or corporate landlords (or even landlords with a local address, but who are often absent), a local landlord is more likely to tend to his/her local properties first.
4) Is the person in charge of property management local? Ensure that the property manager is readily available to deal with any concerns you may have. Property managers may look after multiple sites, and if the sites are not all in the same town or city, the property manager may be out of town – and out of reach – when you need him.
5) What is the building’s history? An older building may require significant maintenance, which tenants pay for in Common Area Maintenance (CAM) charges. The term of a new lease is typically five - 10 years. It may take another five - 10 years for your franchise to become profitable. Are you prepared to invest new money into an old building?
6) Who is doing the property leasing? Landlords may deal with the leasing themselves, hire in-house leasing staff, or turn the listing over to a real estate agent. Each party will have a different motivation for seeing the deal signed, plus each will be more or less knowledgeable about the property.
7) Who were the two most recent tenants to move in and when? You may want to approach these tenants and ask them how their lease negotiations went. To find the newest tenants, ask the listing agent; if he/she claims to have only recently acquired the listing and does not the building’s history, push for details. The agent will have access to the landlord who can provide occupancy records for previous and recent tenants.
8) Who were the last two tenants to move out? The agent will be able to answer this question, but you may want to ask other tenants in the building for more facts. When and why did the formers tenants move out? Were they unhappy with the building and moved elsewhere? Did they close their business? Speak to the former tenants and ask for their reasons for leaving as well as their opinions of the landlord.
9) Who is the property’s biggest tenant (the anchor tenant)? How secure is this anchor’s tenancy? The anchor tenant(s) typically pulls the most traffic to a property so you will want to confirm that they will be staying. The agent you are dealing with will be able to verify this for you. If certain tenants or anchors are important to you, protect yourself with a Vacancy Protection clause, inserted into the Lease Agreement.. Should the anchor close, move or terminate the lease, a Vacancy Protection clause gives you the right to either pay less rent or terminate your lease based on decreased traffic flow.
10) Is the building for sale? Due to the number of limited qualified buyers available, commercial buildings are not advertised for sale in the conventional way (with a conspicuous “For Sale” sign always posted out front). Instead, commercial properties are offered to other landlords through a commercial property website. Building owners looking to sell their building will have different motivations towards prospective tenants.