Does Your Lease Need a Tune-Up?

By: Andy Gutman
Published: November 27th, 2019

Like cars, rental leases can benefit from a tune-up. Location is an extremely important component to a franchise's success and a lease with clauses the franchisee is not familiar with can prove prohibitively expensive.

Whether it is a new lease for a new franchisee opening a first location, or a veteran with multiple sites and existing leases, doing a deep dive with a real estate professional can save money, headaches, and avoid unpleasant surprises.

There are couple items that turn up in leases often, that, if the renter is unaware of, can turn out to be costly. Renters should pay very close attention to their operating expense obligations in order to fully understand their responsibilities in regard to the property they are renting.

Some common items in leases that many renters are not familiar with that can come back to haunt them include:

• The Operating Expense section of a lease should be reviewed carefully and a tenant should ask Landlord to consider putting a cap on the controllable expenses when that can be accommodated. Tenants should also ask to see the history of expenses so they can look for consistency in performance and make sure there are not large increases. Some to look out for in retail leases can be:
  • A major operating expense for retail leases is the obligation to repair and replace the front and back doors. These are exposed to the elements and quickly can be damaged. If the renter is at least aware of this expense they can have regular maintenance to keep them in working order longer without the major expense of replacing them.
  • A rooftop HVAC is another high-ticket item a renter may be unaware they are responsible for. Most renters won't know this until there is a problem and then they are stuck with high cost repairs or replacements. Knowing this obligation and having the unit checked before signing a lease as well as regularly checked and maintained can save money.
• Holdover rates are another area renters should be aware of. If your lease expires and you stay past that time, your lease may state you owe 150 to 200 percent of your rent going forward. Tenants should be aware of this clause so they can begin to see what their options are far ahead of time and make a good decision if they are going to renew.

Some of the above items can be negotiated with the landlord before the lease is signed, but if the franchisee is already in the lease or the landlord won't budge, these are items that renters need to get ahead of in order to budget and plan for.

If this is a new lease there are a couple of additional items that are worth including:

• One is to build in a "right to terminate." This allows the franchisee to get out of the lease early by paying certain costs back to the Landlord that may include the cost to construct the space, leasing commissions, and free rent. In retail franchisees especially, many leases require you stay open as a "dark space" can damage the property's perceived value and can affect the landlord's financing. A right to terminate can lessen the term if business is not going well.
• Another item renters should request is the right to audit the landlord's charges for operating expenses. Without it, you may have to simply pay what the landlord bills you or go to court to get the information to review.

If you are a franchisee with multiple locations - or aspire to be - you should consider working with an attorney and a real estate professional who specialize in retail and franchises to develop your own lease as a "standard." This lease can then be given to the potential landlord as the basis for negotiating costs.

The main takeaway for franchisees is awareness. There may be costs they can negotiate up front before signing a lease or renewal. For those already obligated to a lease, there are many items that can be maintained regularly to avoid expensive repairs and replacements.

 Andy Gutman is the president of Southfield's Farbman Group, a full-service commercial real estate firm that offers a wide range of customized commercial real estate solutions - including brokerage, property management, development and construction. For more information click HERE.

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