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Although it would be nice, it’s highly unlikely that a
commercial landlord will hand you a proposed lease with
correctly-worded and perfect terms and conditions. As we explain in
our new book, Negotiating Commercial Leases & Renewals FOR
DUMMIES, it is likely that you will have to negotiate many of
the primary business terms critical to your business success. Here
are a few things that franchise tenants should not
Choosing between an Offer to Lease or Letter of
Intent: Franchise tenants, landlords, and agents often use
these phrases interchangeably, but these initial lease documents
are different. A Letter of Intent (or LOI) is often shorter and is
non-binding to either party. An Offer to Lease is, typically, more
in-depth and is binding – subject to conditions by the landlord and
tenant. Given a choice, The Lease Coach recommends using an Offer
to Lease rather than an LOI. An agent may try to sway you otherwise
with the argument, “It’s non-binding … what have you got to lose?”.
The truth is that you can have a lot to lose if you send in a
hurriedly composed and/or poorly thought out LOI or sign an LOI
that is unfair to you.
Determining the Parties to the Lease Agreement:
The landlord’s corporate identity is usually well-established;
however, yours may not be. The Lease Coach recommends that you not
list your personal name on the agreement (as you will become
personally responsible for any future losses). Instead, form a
corporation or LLC for your franchised business. Establish your
corporate identity ahead of the negotiation process and have it
ready to use on all correspondence because this name that you use
on the Offer to Lease will carry over into the formal lease
agreement, unless noted that it will change.
Noting the lease term (or length): The majority
of commercial lease deals are five-year lease terms; however,
exceptions have become more commonplace. The Lease Coach frequently
negotiates three-, seven-, or 10-year lease terms. A lease term can
be stated in either months or years. It’s important to factor in
the start and expiration dates of the lease term relative to what’s
best for your business. Franchised commercial tenants should make
sure that their lease term matches their franchise term to avoid
issues with the lease term. This happens when the start date of the
franchise agreement is prior to the start date of the lease
agreement – which may be several months later, when the franchised
business actually opens.
Listing the Base (or Minimum) Rent: Base rent
is the portion of the rent payable to the landlord, excluding
operating costs, and is the most negotiable portion the rent you
pay. Calculating your total base rent is easy – take the number of
square feet and multiply it by the annual rent per square foot to
equal your annual base rent. By dividing the annual base rent by 12
(months), this will equal your monthly base rent for your
Size of the Leased Premises: Most franchisees
know approximately how much square footage they need to
successfully operate their business (or will have this space
requirement provided to them by their franchisor). If a franchise
tenant needs 1,000 sq. ft. and it turns out they’re short 100 sq.
ft., that represents 10 percent of their leasable area (100 sq. ft.
is relative, but 10 percent is huge).
With regards to the square foot measurement, watch for the word,
“approximately” in the LOI or Offer to Lease. A few square feet
here or there may not sound like much but they make such a
difference in the rent you pay and the size of fixtures you bring
in … if you were quoted that the space had 21 feet of frontage but,
in actuality, there is only 18.5 feet of frontage, you can
experience some potential design issues. You also need to be aware
of the inverse of this scenario and getting significantly more
square feet than you need and your rental costs increasing past
your budgeted amount.
There are, of course, many other business terms in a commercial lease. Don’t overlook any of the following:
For a complimentary copy of our CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail JeffGrandfield@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who ; while work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.