When you purchase a franchise that operates through a store, you are often required to enter into a commercial lease. A commercial lease is an agreement that gives the franchisee exclusive possession over the premises for a certain period of time. It’s important to understand the exact terms of the agreement you are entering into – a task with which a commercial leasing lawyer will generally assist you. Entering into a lease with unfavourable conditions can have significant negative consequences for a franchise business, so it’s sensible to get your commercial lease agreement checked by a lawyer before signing it.
As a franchisee, you should look out for the following clauses/particulars when entering into a commercial lease:
Are you actually entering into a commercial lease?
Are you a lessee, a guarantor or a licensee?
There are many different arrangements available to lessors, franchisees and franchisors. Usually a franchisee will be the lessee on the lease. A lessee is a person or business whose name the lease will be under. The lessee will primarily be responsible for the obligations of the lease.
Another common arrangement is for the franchisor to become the lessee and then make the franchisee a licensee and a guarantor to the lease. The licence agreement provides for the non-exclusive grant of the premises to the franchisee (the licensee). Franchisors will often prefer this arrangement, as it gives them greater control over the franchisee. This arrangement is also convenient in the event that a franchisee wishes to exit the agreement. In this case, the franchisor can easily take over the store and will not need to enter into a new lease. Franchisors are also in a better position to negotiate favourable terms in a lease with large lessors.
Finally, a guarantor is a party that ensures that the obligations under the lease are met. If the lessee does not meet these requirements, the lessor may go after the guarantor to fulfil them.
As a franchisee, you’d be wise to have a leasing lawyer carefully review any documents you sign.
Use of the premises
The lease you enter into will have provisions that deal with the permitted uses of the premises. A lessee is typically provided the premises subject to use of the premises for the specific purpose. You should be clear on what your franchise business will be doing on the premises to ensure this matches what the lease allows you to do.
The handover and commencement date of the lease
There are two important dates in every commercial lease. The handover date refers to when the premises will be provided to your business. Once the landlord has allowed you to take possession of the premises, you will be allowed to make certain fit-outs to your premises to make sure you are ready for business. The tenant does not usually pay rent during this period. Where there are adjoining commercial tenants, you may be prohibited from making renovations during trading hours. In addition, many shopping centres prohibit the use of power tools during business hours. You should also be aware of any restrictions on the premises, such as hours of access for renovations and fit-outs. The franchisor will usually assist in making your shop ready for operation but any delay in the process can leave you responsible for rent without opening. The lease commencement date is when a lease will begin. With the help of your leasing lawyer you may even be able to negotiate a rent-free period.
Outgoings of the lease
It is important to understand that there are a number of costs that you may be responsible for outside of the standard rent payments. Outgoings refer to the costs associated with maintenance of the premises. They usually include council rates, water rates, land tax, insurance premiums, repairs, cleaning, and promotional funds for marketing purposes. Even where the franchisor is a lessee, the cost of outgoings is usually passed onto the franchisee. It is important to ensure that you are provided with an estimate of these costs so that your business can budget accordingly. If your lease is a retail lease, then the lessor is required to provide you with an estimate of outgoings. Check with your franchise solicitor to determine who is responsible for the outgoings under the lease agreement/franchise agreement.
Are you considering buying a franchise? Speak to one of our franchising solicitors today. Our team of franchise solicitors have extensive experience in assisting both franchisees and franchisors during the lease negotiations and throughout the franchise relationship. Call LegalVision on 1300 544 755 and get a fixed-fee quote today.