Renewed to Restore: Commercial Lease Renewal Do's & Don'ts for Franchise Tenants
While some franchisees receive real estate assistance from their franchisors on their new locations, very few franchisees receive help from their franchisors on their lease renewals. Since 1993, I have been coaching franchise tenants and speaking at franchise shows regarding commercial leases and lease renewals. When it comes time to renew your lease, here are a few do's & don'ts for negotiating commercial leases and renewals:
- Do create competition for your renewal tenancy. While most franchise tenants will want to renew and stay in their current location, they should not share this information with their landlord. Instead, keep your landlord guessing and negotiate on multiple locations simultaneously - especially with lease renewals, even if you don't want to move. Create options and play one landlord against another. Share with each landlord that you are receiving other proposals. Make the landlord earn your tenancy or re-earn your renewal.
- Do start the planning and site selection process well in advance. For existing franchise tenants and lease renewals, begin 12 months in-advance. This allows for ample time for negotiating, completing paperwork, searching for alternate sites (if necessary), and accounting for Murphy's Law.
- Do keep your success quiet. Landlords may try to raise rent rate due to a franchise tenant's success. With profiting in a particular location, you likely will not want to move even if you can afford the rental increase. Some realtors and landlords will take advantage of franchise tenants knowing how expensive it can be to move and set up elsewhere.
- Do talk to other tenants. For lease renewals, talk with other tenants in the building who have recently renewed leases. Ask how these renegotiations went and what the landlord was willing to agree to in terms of rental rates and further tenant incentives.
- Do negotiate for lease renewal incentives. For some reason, franchise tenants neglect, or are simply fearful of negotiating for lease renewal incentives. If your lease is expiring, ask yourself what inducements (free rent/tenant allowances) would the landlord give to a new franchise tenant just coming into the property.
- Don't have false optimism. When franchise tenants tell me their franchise isn't doing well, but they want to renew their lease anyway, this is false optimism. Unless you change location or something else about the way you do business, you should not realistically expect your next five years to be better than your first five years. Moving can be difficult, frightening, time-intensive, and expensive; however, sometimes, this is absolutely necessary.
- Don't accept an inappropriate lease expiry date. Typically, franchisees open their businesses randomly throughout the year and understandably so… they see an opportunity and wish to act on it immediately. Franchise tenants should instead open going into their busy season (a retailer should open a store in October, rather than December, in order to take advantage of the Christmas shopping rush). Franchise tenants renewing their commercial leases can adjust the lease expiry date - even if this requires a 56-month or 64-month term, rather than the more common five years.
- Don't settle for your same rental payment. Achieving a rent reduction on your lease renewal is a very real possibility. If your landlord is leasing space to new tenants at less than what you are currently paying, a rent reduction for you should be achievable. If your current rental rate is artificially high because of your last tenant allowance, a rent reduction on your renewal term could also be in order. Again, talk with other tenants who have recently renewed or moved in to see how much they are paying.
- Don't allow the landlord to retain your deposit. If you have paid the landlord a deposit, ask for this back upon your lease renewal date. You have proven yourself as a responsible tenant over your initial term. Why should your landlord keep this money?
- Don't use a broker. While it is not uncommon for commercial landlords to real estate agents on new leases, they are vehemently opposed to paying commissions on lease renewals. If you send a real estate agent in to deal with your landlord on your lease renewal, the landlord will charge the commission back to your rental rate. Commercial landlords have no problem working with lease consultants because the tenant pays the consultant, not the landlord.
- Don't disregard your operating costs. Having your lease and/or operating costs audited are effective ways to keep your landlord and property manager accountable. Frequently, franchise tenants pay inflated Common Area Maintenance (CAM) because of padded or miscalculated operating costs. Often, it can be advantageous for groups of tenants sharing the same property to unify for an operating cost audit.
- Don't exercise options. Even though you have a renewal option, you may not want to exercise it - especially if the renewal term's rental rate automatically increases or can't decrease. If you are certain that your landlord wants you to stay and market rates (the "going rate" in your neighborhood) have softened, you may want to negotiate the lease renewal from scratch.
Dale Willerton is The Lease Coach, a Certified Commercial Lease Consultant and author of "Negotiate Your Franchise Lease or Renewal". Got a leasing question? Call 1 800 738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.tates.
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