Franchises and Commercial Leases

Franchising is a popular way of quickly growing a business and sharing the successful blueprint of a good product, service or idea. If you have a strong business brand which is suited for development as a franchise model i.e. it is a profitable business that has a proven track record and a broad appeal that can be replicated, finding franchisees may be a good option to expand. If you have access to some money to invest and you are interested in purchasing a franchise, read on.

Property and commercial leases can be an important aspect of franchising especially in the retail sector. If you are a franchisor or have a master franchise governing a particular territory, you may be closely involved in either sourcing or assisting with property searches for your franchisees, especially if you are a relatively new franchise. You may find yourself devoting a lot of time to establishing a network of valued advisors and instating processes to support your franchisees, earning their trust building relationships and securing the successful opening of a franchise store. If you are a franchisee you also have a vested interest in ensuring that any property deal is right for you including the ability to exit if the venture does not succeed.

Now follow some points to consider when leasing property either from the perspective of a franchisor approving a suitable property or a franchisee taking a commercial tenancy as part of a franchise:

Relationships with property agents

Take the time to find a commercial property agent who understands the nature of your franchise business and who will get the deal done but on the right terms for your business. Closely read their terms and conditions of business so you are aware of fees payable, under what circumstances and by whom e.g. franchisee or franchisor

Do some research

Location is very important, make sure that the shop is in a suitable area to attract the right kind of footfall and has adequate transport links for both customers and staff.

Relationships with legal advisors

Good legal advice can help to protect your position but also alert you to issues that you had not necessarily considered. If you are a master franchisor you can approach solicitors who may give your franchisees competitive rates to act on a series of transactions for the brand and they can also help ensure that you have adequate documentation and practices in place to comply with relevant regulations whilst getting the best deal for you.

Legal structure of the franchisee and the tenant company

If a franchisee enters into a lease in the name of a limited company instead of in their personal capacity, it is generally easier to deal with the disposal or sale of a lease and has less daunting financial implications for the individual.  This is an important consideration if for example a franchisor decides to exercise any option to take back the franchise or if the franchisee wants to terminate. Structuring the deal in this way means that ownership of the lease is governed by ownership of the company which means the requirement for landlord consent to assign can be more easily avoided.

Rent Deposit and Guarantors

If possible, offer a landlord a rent deposit instead of a personal guarantee. This way, in the event a franchisee wants to sell its interest, as above, the implications of disposing of a lease will be less onerous. Naturally a landlord will be more likely to accept a company with an unproven track record without a personal guarantee if the franchise in question has been established for some time and had success in other locales.

Break Clauses

Try to negotiate a break clause with as few conditions as possible in the event that the business does not thrive in the chosen location or the property becomes unsuitable for the franchise for whatever reason. Break clauses can be notoriously difficult to exercise correctly and legal advice should be sought in the event you wish to do so.

Hidden costs of leasing property

Taking on a lease can be an expensive exercise. There are often unexpected costs to consider including relating to decoration and repair, business rates, stamp duty, insurance, service charges planning permissions and professional advisors’ costs. Budget realistically to include hidden expenses including drawing up plans, shop fit out, surveyors’ fees and large outlays such as the rent deposit. Lastly, remember at the end of the lease term there will usually be dilapidation costs to expend to meet tenant obligations.

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