Q: What lease clauses should prospective franchisees watch out for in the disclosure document?
To begin with, the franchisee should review the business terms (e.g. rent, additional rent, deposits, size and location of premises), paying particular attention to work, termination and relocation clauses.
The tenant’s work will dictate the initial investment required to build out the premises prior to the lease’s term. Termination clauses may permit the landlord to end the lease if he/she plans to either sell or demolish the property. Lastly, the landlord may be entitled to relocate the franchise to another location in the building or complex, at the cost of the franchisee.
The disclosure document is a good starting point for reviewing the salient terms of the lease, but the franchisee’s due diligence should not end there. He/she should also review the entire lease carefully with legal counsel and consider it in relation to his/her obligations as delineated in both the disclosure document and the franchise agreement. It is important to be comfortable with the premises as being adequate for the successful operation of the business, with the costs that will be incurred before and during the term and with the risk of the premises being terminated or relocated.
Q: To what degree can the franchisor protect the franchisee against a landlord’s troublesome lease clauses?
The franchisor should attempt to restrict when the landlord will be entitled to exercise termination rights. By way of example, the franchisor should attempt to delete clauses that would permit the landlord to terminate the lease if he/she intends to demolish or sell the premises. If it cannot delete these clauses, it should negotiate revisions, such that the landlord provides adequate notice of the termination to the franchisee and compensates him/her for the amortized value of any fixtures that cannot be removed from the premises.
The franchisor should also attempt to delete relocation clauses in the lease. If it cannot, it should negotiate revisions to restrict the landlord’s right to relocate only to when he/she plans a reconfiguration or expansion of the building or complex. The relocated premises should be of a similar size and comparable location. Further, the franchisor should attempt to introduce a clause that would permit the franchisee to terminate the lease if the relocated premises are not acceptable and to obtain compensation for relocation.
The degree to which the franchisor can negotiate such revisions to the standard-form lease agreement will depend on the relative bargaining power of the franchisor and the landlord, as well as the type of property being leased.