Part 1: What to look for when entering a Lease

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Table of Contents

• The Lease Agreement
• The Lease Term
• Relocation and Redevelopment Clauses
• Conclusion

When it comes to operating a franchised outlet, most Leasing Arrangements either involve the franchisor as head lessee to the landlord, or the franchisee leasing the property directly from the landlord. Sometimes the franchisor will own the property, however, this is less common. So what are the common pitfalls in lease agreements and what should the lessee (whether franchisee or franchisor) look for in the terms?

The Lease Agreement

A ‘standard lease’ does not really exist, as the terms and conditions upon which a lease is based can, and usually do, vary depending on the lessor (the landlord). More or less the entirety of the lease agreement is negotiable, although the Commercial Terms of the lease will generally be more negotiable than the non-commercial. This is particularly the case if the leased property does not fall under the relevant Retail Lease Act in the state i.e. it is not inside a shopping centre.

Only enter into an agreement with terms you actually understand. These lease agreements can be 5 or 10 years in duration so you will want to have an excellent understanding of what you’re singing up for. The better your understanding, the more capable you will be to manage disputes that inevitably arise between lessor and lessee.

The following is a list of some of the more obvious areas of concern when entering a lease as a franchisee that may need to be negotiated further by a leasing lawyer:

The Lease Term

It can be disastrous getting locked into a long-term lease agreement as a small business owner. If, for whatever reason, you must end the lease prematurely, that is before its expiry date, you may end up having to pay rental obligations up to the point when the landlord finds a new tenant. Although the idea is to align the term of the franchise agreement with that of the lease, it is still always more protective to have a lease that is broken into smaller parts. This might mean an initial term of 2 years with 4 added options, each 2 years long. This kind of lease arrangement is less risky and certainly more favorable than an initial term of 5 years with another option of 5 years.

Relocation and Redevelopment Clauses

Have your heard of a relocation or redevelopment clause before? If not, it is important you understand what they mean and how they apply in practice. You will find these clauses in almost all lease agreement for Retail Leases, e.g. properties inside a shopping centre. If you find yourself being asked to agree to a relocation clause, it is important that you speak with a leasing lawyer about how this clause can be negotiated. If you find that the landlord is not willing to negotiate on such a clause, you should make sure that, in the event that you have to relocate, you get the best possible result.

In each state, the retail leasing legislation will detail the minimum notice requirements for redevelopment and relocation clauses. Importantly, these clauses can and should be negotiated. Your leasing lawyer may be able to negotiate the inclusion of a clause that relinquishes the obligations of the tenant to ‘make good’ the premises in the event that the landlord exercises its right to redevelop or relocate.

Conclusion

If you are looking to enter into a lease agreement regardless of who the landlord may be, there are a number of things you need to be aware of before going ahead and signing the agreement. If you need a Leasing Lawyer to assist you during your negotiations with the landlord, contact LegalVision on 1300 544 755.