A properly negotiated lease is critical to protecting your franchised business as well as the franchise network and brand. For franchisors, entering into a commercial lease agreement is an important step as the location out of which a business operates is critical to its success. Indeed, the adage “location, location, location” is much more than a cliché: Your business should be in a prime spot with heavy traffic and other quality (non-competing!) businesses nearby that attract patrons. Aside from location, there are other issues inherent in leasing, most notably, securing a lease that protects your ownership interest in your franchised business.
Franchisors often encounter these scenarios: changes in your business model, competition from nearby competitors, struggling franchisees, and a need to assign the lease to a new party. Here are a few key considerations in negotiating and executing a lease agreement that will help you address these situations.
Restricted Use Clauses
Many landlords who rent to franchisors seek to restrict the use of the premises. As such, the “permitted use” and “exclusive use” clauses in lease agreements are typically the most heavily negotiated.
First and foremost, franchisors must ensure that the lease agreement authorizes them to operate their specific business on the leased premises. In doing so, be cautious not to construe the use clause too narrowly: Many franchisors prefer to negotiate certain loopholes to allow for changes in their business model. For instance, a coffee shop should include permitted use language that the premises shall be used to serve coffee “and other items typically sold at similar establishments.” That way, you have the freedom to sell food items as well as caffeinated beverages.
Franchisors also typically want to restrict the use of the surrounding establishments to prevent competition. They will seek assurances from the landlord that identical or very similar businesses will not be permitted to rent space in the same shopping center or commercial area. Provisions that promise the exclusive right to sell a certain type of product, though, are rare and difficult to enforce. Nonetheless, a best practice is to execute an “exclusive use” clause that restricts a competitor by specifically nailing down the items for which the exclusivity applies – for instance, by naming the specific types of competitors and menu items that you want to preclude rather than banning all businesses of a certain type, or by limiting the floor area that another tenant can use to sell exclusive items. Be sure to engage an experienced attorney to help you draft and negotiate these provisions to ensure that you are protecting your business and brand as much as possible.
Expansion and Brand Protection
Two major concerns for franchisors are 1) growing and scaling their businesses and 2) brand protection. In negotiating a lease agreement, it is important for you as a franchisor to draft assignment provisions so that you can freely expand your business – that is, to assign your lease to your franchisees and move on to other franchise locations. As far as brand protection, be sure to stay involved if your franchisees are directly entering into a lease agreement. Generally, it is a good practice to require your franchisees to negotiate an assignment provision whereby the lease can be assigned either to you or to another franchisee without the landlord’s prior consent. This would allow you to eventually take over the lease and to assign it to another franchisee if the existing one is underperforming.
In the same vein, negotiate into your lease a right to monitor your franchisees’ performance. In other words, retain the right to be notified – and to step in to cure any default – if one of your franchisees violates a provision of the lease. This will protect your business’ reputation in the long-term. However, make sure that you retain this as a right, not an obligation.
Finally, retain the right to de-brand one of your business locations upon the lease’s expiration. A vacant storefront reflects poorly on your brand. Not to mention, you will want to step in to reclaim your signage, equipment, and other materials. Don’t, however, agree to return the premises to the landlord in the same condition in which it was entrusted to you.
In negotiating a lease agreement that affords you the opportunity to grow your business and protect your brand, it is critical to seek the advice and guidance of a seasoned franchise attorney. Before signing on the dotted line, do your due diligence, engage a professional, and make sure you understand how the lease provisions are impacting your rights and responsibilities as a franchisor.