Franchise Mama

n my book, Negotiate Your Commercial Lease, I share with you many horror stories of tenants who have learned their lessons the hard way. In today’s commercial real estate market, it is simply far too costly not to use these lessons to your advantage. In this column, I will share with you a few of the lessons that easily could have been avoided.

Lesson One – Don’t wait for the landlord to call you about your upcoming lease renewal. A tenant who had just hired us to negotiate his lease renewal waited until the last month before becoming proactive. Now, he is facing a substantial rental increase from $6.00 per square foot to $11.00 per square foot in addition to Overholding Period Penalty charges. The Overholding Clause can be found in most lease agreements; this anticipates that the tenant may not move out when the term is completed. Essentially, the landlord is saying to the tenant that, should he/she stay in the premises on a month-to-month basis, all previous terms and conditions will still apply; however, the rental rate will double or even triple. Why so? It is expected that market rents will increase after a number of year plus the landlord is essentially penalizing the tenant for staying short-term.

Renewing your lease must be a proactive measure initiated nine to 12 months before your lease agreement expires. Tenants have come to us with days or only weeks left on their lease term only to find out that the landlord will only renew their lease at a much higher rent, or not at all. Whether the news is good or bad, it’s better to find out nine months in advance so you have ample time to make plans to relocate, if necessary.

Lesson Two – Ensure the business terms of the Offer to Lease match the Formal Lease Agreement. A large retail tenant (part of a national chain) signed an Offer to Lease that included several months of free rent. The tenant didn’t have anyone review the landlord’s Formal Lease Agreement and simply signed it. The free rent was left out of the Formal Lease Agreement and the tenant had to fight to get back what he had already won. Don’t assume the two documents will be carbon copies of each other. If you cannot stand the thought of plowing through a 50-page Lease Agreement, have a Certified Lease Consultant do it for you.

Lesson Three – Even if a landlord is being truthful with you, he/she can be wrong. A tenant signed a lease for approximately 4,400 square feet (or so it was thought). When we measured the space for the tenant we discovered that the occupied space was only 3,600 square feet. We fixed the problem for the tenant and recovered over $50,000 in overpaid rent, but what if the space had never been measured? That same tenant today would still be paying rent for an additional 900 square feet he did not have. Watch out for the so-called “phantom space”. Have your space measured and don’t take the landlord’s word for it.

Lesson Four – Don’t assume the landlord has seen or approved the Offer to Lease before you sign it. When tenants hire The Lease Coach often they have received an Offer to Lease from the landlord’s broker and want some advice before responding or signing it. Many business owners have pulled their hair out in frustration after signing the broker’s Offer to Lease only to have the landlord ask for more rent in a counteroffer. I explained that this is what’s called a broker driven deal. The listing broker or agent wants to get your signature on the Offer before he/she presents it to the landlord. If the landlord hasn’t signed the Offer being presented to you, ask the Agent if the landlord has pre approved the deal. If not, there may be no deal at all.

Lesson Five – Get it in writing. A tenant told me that his landlord had agreed to provide him with several additional considerations above and beyond the terms and conditions of the lease agreement. When I inquired with the tenant why he had not insisted on getting these items in writing he could not answer me. If there is something you want added to the Offer to Lease or something you want changed in the Formal Lease Agreement, do not wait for the landlord to change it – pick up a pen and change it yourself. Don’t be afraid or shy and don’t be too nice for your own good. If it’s not in writing, it doesn’t count.

Lesson Six – Don’t assume the franchiser will be doing your site selection and lease negotiations in-house. Don’t get me wrong I’m pro-franchising. Many of our clients are franchisers and many more are franchisees. A franchisee recently hired The Lease Coach to do her site selection and negotiate the lease. Why? Because the franchiser had turned the entire site selection process over to a local broker who was in fact representing the landlord’s best interest. The tenant became suspicious when the only properties she was being shown were the broker’s own listings. No one can serve two masters. You must look out for yourself and that means scrutinizing the advice and counsel you receive.


If there is an article idea relating to commercial leasing that you would like to see on the Franchise Mama website, please notify Rick Lauber, Publicity and Marketing for The Lease Coach. You can reach Rick directly by e-mail to ricklauber@TheLeaseCoach.com.


Dale Willerton is Founder of The Lease Coach®, a network of Certified Commercial Lease Consultants who work exclusively for tenants and franchisees across the US and Canada. For more information, e-mail DaleWillerton@TheLeaseCoach.com, call 1 (800) 738-9202 or visit us at www.TheLeaseCoach.com.

Q: Is it okay to sublease from the franchiser or should I insist on a head lease?

A: Whoever holds the head lease has the most power. However, subleasing is very common and very acceptable in most cases. A franchisee client of mine had several stores in a small regional chain. When the franchiser went out of business, he almost lost his location altogether. As the subtenant or the subleasee, it can be beneficial to negotiate for the first right to lease the location if the franchiser goes broker or gives it up for any reason.

Q: Will the franchiser get me the best rental rate, free rent package and tenant allowance possible?

A: Not necessarily. Some franchisers do cookie-cutter deals that call for two months of free rent plus a $15.00 per square foot tenant allowance. A Lease Consultant may be able to negotiate much more for you. Unless you have negotiated accordingly, there may be no provision in the Franchise Agreement or the Sublease Agreement for you to receive anything the franchiser got. In one case, a franchiser negotiated for eight months of free rent but only gave the tenant three months free. The franchiser would receive a large tenant allowance from the landlord, build out the store – then sell the store to the franchisee charging him/her for all the buildout costs and, therefore, making a handy profit.

Q: I’m buying an existing franchise … should I take an assignment of the lease or insist on a new Lease Agreement?

A: If the current rental rates are below market rates, take an assignment. However, if you sense that the market has softened, then negotiating a new deal can result in a rent reduction. Either way, your offer to purchase the business should be conditional upon your satisfaction with the lease terms and landlord consent to your assignment or tenancy. If the lease only has a few more years remaining, don’t assume that the landlord will automatically renew your lease. One client offered to purchase a national quick-service food court outlet then sent me in to negotiate the lease terms. We discovered that the landlord planned to relocate the entire food court within a few years – meaning the purchaser would be paying full price to buy the store but also required to build out a brand new store in a few years in the same mall. Wisely, my client decided to pass on the business opportunity.

It should come as little surprise that we, at The Lease Coach, answer plenty of questions! We thought we would share a few of the most-commonly asked questions here:


1) What does "NNN" mean?

"NNN" refers to the Triple Net Expenses in the property. Triple Net Expenses are also known as Operating Costs and include property tax, insurance, maintenance, etc. As a tenant, you will be required to pay Triple Net Expenses, proportionate to your amount of space leased. Therefore, if you lease 2% of retail space in a shopping centre, you will pay 2% of the mall's Triple Net Expenses.

2) What is the best and least expensive way to negotiate an early lease termination?

The simplest and most cost-effective means for you to terminate your lease early is by approaching your landlord now. Honestly explain to your landlord that your business is not doing as well as you had hoped. In this conversation, be careful to never blame the location or your landlord may get defensive). Many landlords will understand and try to re-lease the space now rather than later ... it is to their benefit to have a tenant who can pay rent rather than a tenant who cannot. Traditionally, there is no penalty for you to in this process.

3) What is a "bonded lease"?

A bonded lease, essentially provides security and insurance for a landlord. If you, as a tenant, do not pay your rent for any reason, the bonder covers the rental rates to the landlord. If you are considering this option, remember that this will eliminate the need to provide the landlord with a personal guarantee.

By: Dale Willerton , The Lease Coach ® www.TheLeaseCoach.com

A good business in a poor location will become a poor business!

The number one reason for business failure or negative performance is a poor location. A poor location ultimately results from poor site selection. Consider that identical stores from the same chain or even similar stores within the same industry will vary as much as 200% in volume of sales annually; the primary difference would be location. Other factors include store size, marketing budgets, management and so on, but these are secondary to the importance of location.

Essentially there are three types of locations: Profitable, Break-even and Go-broke:

* A truly profitable location will make money and the business will appreciate in value.

* A break-even location will pay the owner a small salary and pay the rent but not much more.

* The go-broke location demands the owner continually pour more money in to survive. The example that comes to mind lasted less than three months from opening to closing for one unfortunate tenant. Despite my warnings that this was a go-broke location, the business owners spent over $80,000 into their store setup and, by the second month of operation. couldn't pay their rent. Usually a go-broke location will not only steal your capital but put you into personal bankruptcy, after you've maxxed out your credit and second-mortgaged your home.

If you thought site selection was all about Location , Location , Location you're right intellectually. However, when tenants are involved in the site selection process, good old common sense often goes out the window. Consider for a moment that site selection is not a science; it's an art, part research, part luck, part timing and many other ingredients combined. For example, is the best time to do site selection is before or after you commit yourself to opening a business? If it sounds too obvious don't be fooled; most tenants do their site selection after , not before , committing themselves to a business opportunity. One such case involved a retailer who began receiving seasonal spring inventory for a new store but he hadn't finished picking the location for the store or negotiating the terms yet. Consequently, this entrepreneur compromised on the location and on the best deal he could have made just to finally get open.

In my book, NEGOTIATE YOUR COMMERCIAL LEASE, I've dedicated an entire chapter to site selection. Here are some topical tips from the expert:

1. Allow enough time so that you're not making decisions under pressure. Typically, for a new business you should start the site selection process six months in advance of when you wish to open. If you find a really hot location, usually the landlord will hold it for you for a few months. However, if the process takes longer you may need several months to finalize the Offer to Lease, review the formal lease documents and build out the store.

2. Don't let a realtor/agent (who represents landlords) show you space all over town. In this industry, there are agents who list the property and other agents who lease the property; however, there is only one commission paid by the landlord. When listing agents both list and lease the property, they will gain as much commission as possible. The commission pie, however, is only so big. When an outside agent introduces you as a potential tenant, the listing agent faces accepting less of the landlord's commission therefore, he/she becomes considerably less motivated to do the deal with you preferring to find his/her own tenant to lease the space , thereby earning all of the commission.

Additionally, doing this will also undermine your negotiating power since the real estate agent will know how you feel about every location. A realtor may be helpful in pointing out a location you were unaware of but remember he/she is working for the landlord who will ultimately pay a commission. While an agent's advice may sound sincere, it may be sincerely wrong.

3. Make your leasing inquiry by calling the For Lease number on the property or on the leasing agent's sign, after you have finished driving around doing site selection. This way you will meet and negotiate with, or through, the listing agent directly. View prospective sites from worst to best. You will become better at handling yourself and by the time you get to the property you like the most you ask better questions and gain more control of the leasing process.

4. Don't telegraph your intentions by giving buying signals. I recommend that you have the leasing representative fax or send you some preliminary information in advance before you agree to view the space. During the viewing, stifle the urge to think out loud; subtle comments to a partner or spouse overheard by the landlord's leasing representative or property manager can work against you. For example, “This could be my office or “We'll need to change the carpeting will indicate your interest in the property and will work against you when it comes to negotiating the terms. If you're asked how much you've budgeted for rent payments, be vague. Not every question asked deserves an answer, not yet anyway.

5. Never make the first Offer to Lease. The landlord's leasing representative, upon your request, will prepare a lease proposal or an Offer to Lease containing suggested Terms and Conditions for your tenancy. While this is not a site selection tip per se, it is an integral part of the site selection process. When you receive an Offer to Lease first, you will then be nicely positioned to counteroffer or negotiate the proposal.

6. Don't negotiate on only one location at a time. You can - and should - create competition for your tenancy; you can do so by obtaining lease proposals on several different properties simultaneously. Avoid the tendency to negotiate on one deal at a time. Negotiating on multiple locations at the same time may be the single most effective tool you have for creating the best deal. While one landlord may offer you three months of free rent, the next may offer four months and so on. By playing one landlord's lease proposal against another, you will be negotiating from a position of strength.

7. Do your homework before you start. Get out a map and mark the boundaries of where you're willing to open your business. Use the Yellow Pages to pinpoint locations of competitors and complimentary tenants that might enhance your business. Talk with existing tenants in buildings you've selected as prospective sites doing this can provide a wealth of information. Remember that good preparation is an excellent substitute for novice negotiating skills.


If you find yourself trying to decide between a better location at a higher rent versus a lesser location for a lower rent my advice is go for the better location. When I'm consulting to tenants and doing site selection my job isn't to find the cheapest location , it's to select a site that will help the tenant maximize sales. Remember that you want to be profitable , not break-even. It is better to have negotiated poor lease terms on a good location than a great deal on the wrong location.

When doing site selection, consider that landlords sometimes prefer to lease their worst space first and save the best for last. Usually, the individual unit or location you lease within a shopping centre or strip mall is more important than the mall itself or at least equally important. Lease rates can vary two to three times within the same building depending on the following: desirability and demand for a particular premises - the time of year , visibility , walk-by or drive-by traffic flow , accessibility , frontage , the shape of the space , the quality of neighboring tenants , anchor tenants , and whether or not you will be operating as an independent or a national chain name. While you don't always get what you pay for in leasing commercial space, you don't normally get more than you pay for either.

If you are aware of a great building without vacancies, don't despair. By contacting the property manager or leasing representative you may discover that another tenant's lease is about to expire; the tenant may therefore close out or move. Perhaps a tenant will be leasing month-to-month while the landlord hopes to find a permanent tenant like you. Don't rule out the hot properties just because there are no vacancies. Every building has tenant turnover sooner or later. Frequently when my client has wanted to open in a less desirable location (because nothing else is available) I encourage him/her to wait. We stay in contact with the landlord and invariably a better location usually becomes available within a few months. Considering that you will be leasing that location for a very long time it's worth the wait.

For some business operations location is absolutely critical and for others it may be less important. If your business is not location-dependent then you should have the proverbial upper hand in your negotiations. This applies more so to office or industrial type tenants.

If you already own a business but are considering relocating upon expiry of your current lease, you should start the site selection process at least nine months in advance or more. The theory is that if you can't get a good lease renewal you need enough time to select alternative sites and negotiate a new lease elsewhere. Good luck with your site selection.

This is the first article in a series of columns on Leasing. In forthcoming write-ups, I will discuss learning from other tenant's mistakes, increasing your bargaining power and choosing the proper lease term (or length). Please send any topic suggestions, stories and comments to Rick Lauber in our Marketing Department at 1-800-738-9202.




Dale Willerton is Founder of The Lease Coach®, a network of Certified Commercial Lease Consultants who work exclusively for tenants and franchisees across the US and Canada. For more information, e-mail DaleWillerton@TheLeaseCoach.com, call 1 (800) 738-9202 or visit us at www.TheLeaseCoach.com.