Franchising and Real Estate
Franchise law often overlaps with real estate law for the simple reason that many franchised businesses need a commercial or retail space in which to operate. When a franchisee first begins the process to join a franchisor’s system, negotiating and finalizing the franchise agreement, along with the proper due diligence, takes priority in the progression to starting its business. Almost immediately following the execution of the franchise agreement comes the need to assess the business’ real estate needs. Finding a prime location, ideally with favorable rent and overhead costs, will be essential to the business’ success.
Lease drafting and negotiations can take some time, but it is critical to assuring that the franchisee-tenant’s rights are as beneficial as possible. A franchisee will usually negotiate its own business terms, such as the length of the lease term, base rent, and other overhead costs. However, it is important to have an attorney review and negotiate the legality of the lease agreement.
Franchisors usually will have required terms that must be included in any lease, including the right to occupy the premises and take an assignment or assign the lease in the event of a franchisee-tenant’s default. Sometimes these requirements are included in a franchisor addendum. These provisions must be addressed at the outset or the space will not be tenable.
Lease terms that are often overlooked by potential tenants are the assignment and subletting provisions, relocation provisions, real estate tax and CAM charge provisions. Landlords will often either prohibit assigning and subleasing in its entirety, or require their prior written consent. Sometimes, a landlord may give itself a right to “recapture” the leased space if the tenant requests to assign or sublease premises. An attorney will often negotiate for the removal of the recapture right and provide that landlord’s consent to an assignment or sublease not be unreasonably withheld or denied. This is important to a franchisee-tenant because it allows for the flexibility needed to assign the lease if they decide to sell their business in the future. Relocation provisions can be very burdensome and should be removed or renegotiated. Tax and CAM clauses must be investigated carefully for future increases.
Beyond the transactional lease work, if a franchisee is responsible for the build out of its space, they will have to assure that they are in compliance with applicable building codes and that all required permits are obtained. Building out a space will often come with having to review general contractor agreements, sub-contractor agreements and third-party contracts. Further, build outs are often costly and a franchisee tenant may have to obtain sufficient financing in order to complete the work. It is very important that all the above is negotiated to the franchisee’s favor and done timely in order to avoid fines and potential litigation.