How Can Franchise Owners Collaborate With Legal Counsel to Build Stronger Negotiations With Landlords?

Purchasing a franchise gives you leverage when bargaining with landlords to secure a lease for your new business. Yet you could still face unexpected pitfalls and roadblocks without understanding how to apply that leverage. Working with an experienced attorney provides professional support to discern what may be missing from your lease.

How can franchise owners collaborate with legal counsel to build stronger negotiations with landlords while turning the lease terms to their advantage? The lease review and negotiation lawyers at Luther Lanard can assist you in ensuring the lease protects your interests as well as the landlord’s. Let’s examine common issues that can arise during negotiations and how to get the most from your attorney-client relationship.

Your Franchisee Status Makes You an Attractive Tenant

If you’re new to owning a business, you may be unsure of how to approach lease discussions. You might assume that you have to accept the terms without question and make the best of it. However, you have substantial bargaining power simply because you have the backing of your franchise brand behind you.

A well-known brand means a greater likelihood that you won’t miss rent payments, and you have the capital to maintain and improve the property. You can also rely on the standardized lease terms required by your franchisor to set the foundation for establishing your side of the negotiations. Your franchisor may even collaborate with you and your franchise lawyers to present your desired terms to the landlord.

The larger group buying power and regional or national support from a franchise brand for marketing can also improve your bargaining stance. By driving traffic to your location, your landlord can benefit from a consistent, long-term tenant who increases the property’s value over time. 

How Your Franchise Attorneys Assist You With Lease Agreement Review

If you hired a franchise lawyer before you purchased your franchise, you already know how much they can do to help you prepare for this type of business. They guided you through the process as a first-time franchise buyer and helped you evaluate a retail location. They may have assisted you with reviewing a development agreement and considering your growth potential. 

Because attorneys wrote it for your landlord, you need skilled franchise attorneys to review your commercial lease agreement for your benefit. Critically, commercial leases are typically highly negotiable.  An attorney can look for issues of concern, such as your stated use for the site, any limits on how you use the location, and your right to exclusive use in a larger retail facility. 

Your franchise attorney can also evaluate any tenant improvement allowances (TIAs) and what they cover. If you are leasing a space that’s barely more than four walls, you may be able to secure a higher allowance than if you’re placing a food service franchise in a location that already has a commercial kitchen. That said, you may still need to retrofit or upgrade equipment to meet your franchisor’s standards, once again giving you a more forceful bargaining position. 

Potential Franchise Lease Agreement Terms Your Attorney Will Examine

Part of your lawyer’s job in a commercial lease review is interpreting the fine print in your agreement. They will review the key issues that could impact your success and make recommendations for amendments in your favor. These typically include:

Operating Costs

Whether your location will be standalone or part of a shopping center, your agreement will include operating expenses the landlord charges to cover insurance, taxes, and other costs. In a mall, these Common Area Maintenance (CAM) charges cover walkways, roof maintenance, public areas, and bathrooms. Your attorney can help you negotiate a fair share without overburdening you as a new tenant.

This is a critical area for discussion since operating expenses can quickly become a large share of what you owe each month if you don’t argue to exclude some costs. For example, you should aim to disallow depreciation, the landlord’s legal fees for collecting overdue payments, hazardous cleanup costs you don’t cause, and capital expenditures by the landlord. Your lawyer will tailor these discussions to your lease agreement to protect your interests whenever possible. 

Maintenance Obligations 

Maintaining critical systems such as HVAC and plumbing should fall on both parties, but not always equally. Your franchise attorney can bargain for the landlord’s responsibility for installation and repair costs for the first year of your lease. Beyond that, you can manage standard tune-up and repair expenses, unless you discover the system is outdated after signing your lease.

At that point, your franchise attorney can reopen negotiations to seek concessions for compensation directly to you or the repair/replacement of the system components. Compensation might take the form of an increase in your TIA, allowing you to oversee selection and installation to meet your business’s requirements. 

Personal Guaranty

After the housing crisis of 2008, landlords learned a difficult lesson when many could not pay rent on either residential or commercial properties. This gave rise to the personal guaranty in commercial leases, where you sign a separate agreement taking financial responsibility for rental costs if the business cannot meet the liability. A personal guaranty allows the landlord to come after your personal assets to cover costs, something that definitely requires aggressive renegotiation by your attorney. Personal guaranties can often be limited either in duration (how many years of lease payments) or in capping the amount.  

Your lawyer may present a Letter of Intent prior to lease discussions, notifying the landlord that you will consider a limited personal guaranty if necessary. This establishes your position early and gives you a stance from which to make concessions if they are not too onerous. 

Percentage Rent

A typical commercial lease includes your base rent, which you pay monthly no matter your revenue, and a percentage rent, which is a percentage of your monthly sales. This amount fluctuates with your business performance, but can be more punishing if you have great success. 

Percentage rent can push your monthly rental costs much higher than fair market value. If your market research indicates that you’re likely to do very well in your chosen location, your franchise lawyer may suggest negotiating for percentage rent only, minus base rent. 

Permitting

If you will need to build your franchise location or renovate an existing premises, you’ll need to apply for commercial permits from the City of Dallas. Your franchise attorney can investigate limitations from the city or other municipalities, seeking contingencies when appropriate. Part of this process is negotiating support from the landlord and writing that into your lease agreement.

Your lawyer can also assist you with the commercial development process in accordance with Dallas’s laws. Fortunately, the Office of Data Analytics and Business Intelligence (DBI) in Dallas has created a real-time permit management dashboard, allowing you to quickly assess your progress. 

Signage

Your franchisor will supply and assist you with signs for your location, but you must also negotiate support from your commercial landlord. Present your materials and franchise requirements before signing to secure pre-approval, including a signage contingency similar to the permitting process. Ideally, your attorney can obtain prominent placement in highly trafficked areas or a shopping center’s monument. 

Right to Review the Landlord’s Books and Records 

You should trust your landlord’s bookkeeping methods, but it’s wiser to incorporate the right to review in your lease agreement. By having the right to request an audit, you can verify that you aren’t overcharged regarding CAM costs for insurance, taxes, and operating expenses. This requirement should also include annual reconciliation statements so you can match what you paid with what the landlord claimed.

Default Clauses and Remedies

Two of the most critical clauses in any contract define what happens when things go wrong. If you happen to go into default for payments or upkeep on the property, what are your options for repairing that default? Does the process differ for monetary versus non-monetary default issues? Further, how will you and the landlord address remedies for each party in the event of a default?

The language here should be very clear. It should denote whether the landlord has the right to seize any property, bar and lock the door, or initiate legal action. It should describe the timeframe and request the use of alternative dispute resolution (ADR) methods prior to a civil suit.

Relocation

If your business opens in a shopping center or mall, the lease agreement may include a right to relocate your franchise if the landlord wants to make room for more tenants. In certain businesses, such as food service, this can be highly disruptive and detrimental to your success. Your franchise lawyer can negotiate limitations on the impact on your business’s viability, when relocation can occur, and how long it takes.  

You’ll also want to verify that you won’t see a rent increase if you’re forced to relocate to a larger space. If you’re moved to a smaller location, you should also see a decrease in rent and costs. 

Repair Costs

Finally, your lease should describe when, how, and for what reason your landlord should make repairs rather than you. While these costs are a part of doing business, many of them should fall to the property owner rather than the tenant. 

You should ask for the right to withhold rent until the landlord completes repairs, along with a self-help clause for the right to make your own repairs if there’s no response within a certain timeframe. If you include that option, make sure you set a time period, such as 10 business days or two weeks, for the landlord to reimburse you. 

Your Legal Counsel Can Help You Enter, Renew, and Exit Lease Agreements

Part of your lease agreement conversation should be what happens at the end of the initial rental period. Will you face rent increases that align with your location’s actual operating expenses, taxes, and insurance? Does the landlord have a good history of favorable renewal terms to foster a lengthy relationship?

Fortunately, a skilled franchise attorney will align your commercial lease agreement with your franchisor’s requirements, including renewal and transfer terms. If you decide to sell your business or relocate, your lawyer will make every effort to provide for these possibilities during negotiations. They can also work to secure exit terms that might include moving to a different property owned by the landlord or leaving the relationship completely.

Watch out for clauses that require a landlord’s consent before you sell or transfer your franchise, or those that give them too much control over your business decisions. Your lawyer can help you avoid conditions, such as rent increases or lease modifications, that could negatively impact your sale.  Franchise lawyers also typically can negotiate addendums or language that allows for the transfer or sale of the franchise to another franchisee or the franchisor. 

One potential issue is the cross-default, which allows your landlord to declare a default on your lease if you lose your franchise agreement. Without careful negotiation for response periods, cure methods, and tenant protections, you could be facing substantial legal and financial jeopardy even if there is only a dispute about your agreement. 

Your Franchise Attorney Can Assist With Future Lease Agreement Issues

Once everything is signed, you may breathe a sigh of relief and believe the worst is behind you. However, you may still need guidance from your franchise law firm if the landlord fails to meet the contract terms. They may attempt to improperly raise your rent or CAM costs, renege on signage and permit assistance promises, or refuse to meet their maintenance obligations.

You could feel trapped because your franchisor has expectations that landlord issues can make it harder to meet. Remember that your legal counsel can advise on matters of breach of contract or that fall under the ​​Texas Deceptive Trade Practices Act (DTPA). If your business has less than $25 million in revenue a year, you count as a consumer under the Act, eligible to hold the landlord accountable through legal action.

Contact Our Francise Lawyers for Peace of Mind

At Luther Lanard PC, our franchise attorneys can assist with interpreting the Deceptive Trade Practices Act, filing claims when appropriate, and protecting your franchise future. We focus exclusively on franchise law, serving clients across Dallas and all of Texas. Request a consultation with us today to discuss what we can do for you.