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What to look out for in a lease for a franchise business

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Questions to ask yourself before you sign

As a new franchise business owner, in most cases you’ll be operating your business from commercial premises – which in most cases means you’ll need to arrange a lease for your business.

Naturally, every franchise agreement will be different. But in most cases, negotiating and signing the business’s lease will be your responsibility as the franchisee.

Your business premises may be leased directly to you from a third-party landlord, or in some cases the franchisor takes the lease and then subleases it to you as the franchisee.

Whichever structure applies to your agreement, it’s important to note that you are always responsible for the full term of the lease with either the franchisor or landlord. You are only released from your obligations if you either negotiate a sale, or the franchisor takes back the business.

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Of course, it’s so important that you study your franchise documents closely and seek independent legal and financial advice. After all, they will outline your responsibilities and obligations under the franchise agreement.

But if you’d like some initial guidance about what to look for, this news post details some questions you might like to ask yourself before you commit to a lease for your new franchise business.

Who’s responsible for your business fitout costs?

When you’re moving into a new business premises, you’ll most likely need to arrange for a suitable fit-out. It’s a major task, often with a major price tag!

Make sure you understand ahead of time who is responsible for organising the fit-out. Your franchisor may have specified suppliers that you must use, or they may have a ‘minimum standard’ that you have to meet if you choose your own suppliers.

Lastly, to ensure your fitout suppliers have time to do their job, think about negotiating “early access for fitout” in your lease, or alternatively a rent-free period to accommodate the fitout.

Have you considered all leasing costs in your finances?

As we’ve spoken about before, as a franchisee you’ll be responsible for many different costs – and many of them apply to your lease. It’s important to understand and plan for these costs, so you don’t get hit with any nasty surprises.

For example:

  • Are your leasing costs calculated as a percentage of sales? If so, does your cash flow forecast still show that you can be profitable when you take ALL costs (wages, fees, rent, power etc) into consideration?
  • Does your new landlord require a security bond such as 3 months’ rent?
  • Do the term of your lease and your franchise term match up with each other? You don’t want to be caught in a situation where your franchise term ends earlier than your lease – meaning you’ll be paying rent AFTER the business is out of your hands. And vice-versa!

You’ll need to think carefully about all these costs, and factor them into your finances accurately.

What insurances & deposits will your landlord require?

Your landlord will probably require you to take out appropriate insurances – such as plate glass and property against theft/breakage – as a condition of your lease. Double-check to make sure you are able to obtain them before you start trading.

Another cost to prepare for is the security deposit or bank guarantee that your landlord will probably require as security for you occupying the property. If you default on your lease or damage the property, the landlord can draw down on the security deposit or bank guarantee to pay rental arrears or make good any damages.

And while you’re looking ahead, make sure you clarify the “permitted use”, which describes the type of business that you can run in your shop. Make sure you are legally able to sell the products you intend to!

Lastly if you’re running a food business, ensure you check that you have the relevant approvals in place. For example, you may need to acquire a food business licence from the local council.

What happens when your franchise term ends?

Even if you have a 5 year agreement with your landlord, you should still consider what happens to your business after this period.

Does the landlord offer an option to renew the lease on the existing terms? Or will you have to start the process all over again – with all the associated fees that will bring?

Remember that, as a new franchise owner, you may only really start making your money back after paying all those setup fees after a few years. So you definitely don’t want to have to start all over and pay again.

Consider to that the franchisor may want to re-sell the franchise if you haven’t met your KPIs – so keep a close eye on how you’re travelling over the journey.

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Do you have an exit strategy in place?

As a franchise business owner, it’s important to ensure you have an exit strategy, both from your lease and the franchise agreement.

In the unfortunate event that your business seriously struggles, and you decide to “pull the pin” and make an early exit, you still may have to pay the remaining term’s fees, or wait until they find another buyer.

To avoid this scenario, consider adding a “transfer agreement” into your franchise agreement, stating that you can sell the business during your term. You can then sell the business as you would any other business, either in terms of profit and loss or at a break-even point.

Talk to MDL for advice on a lease for your franchise business

As you can see, there are many different issues to consider before you sign a lease for your franchise business.

So if you need advice or assistance with putting together a lease on your terms, a conversation with McCarthy Durie Lawyers can help. We’ll take the time to understand your situation, and offer you straightforward advice about your options and the best way forward. Contact the Business Law team at McCarthy Durie Lawyers on 07 3370 5100 or fill out the contact form here.

We have assembled a highly experienced, capable team of legal practitioners, committed to delivering you expertise across all legal services. Find your local office: