10 Facts Franchisees Need to Know About Real Estate Leases

After franchisees have finalized the site selection process, they can proceed to work with the landlord in securing a suitable commercial lease. Because commercial leases do not adhere to any "form" or "standard" template, landlords have the freedom to customize contracts according to their preferences and requirements. This makes it imperative to understand what may be typically included. 

Here are 10 facts to know about real estate leases, according to Entrepreneur’s Franchise Bible. 

The Base Provisions

The base provisions of a lease outline the fundamental terms and conditions of the agreement. These include details such as the lease start date, duration, rental amount and any rent escalation clauses. Understanding these provisions is crucial for budgeting and financial planning. This section introduces the landlord and tenant by name and contact details, and encompasses the following information:

• Common areas: Shared spaces benefiting all tenants for which CAM costs are calculated
• Lease term: Duration expressed in months, years or a combination of both
• Permitted use: Specific purpose for which the tenant is renting the property (ex. a nail salon or juice bar) 
• Premises identification: Location, square footage
• Rent and expenses: Base rent,  common area maintenance (CAM) costs, tenant's share of CAM costs, landlord's insurance, real estate taxes
• Security deposit: Amount provided by the tenant to ensure compliance with the lease terms

The Term of the Lease

In addition to clarifying the time used to occupy the premises, include any renewal options or termination clauses. Planning for the future and ensuring flexibility can be key factors in negotiating favorable lease terms.

The Condition of the Premises

This section outlines the necessary tenant obligations for making the premises fully rentable. For example, the premises should be free from infestation, have adequate heating, hot water, smoke detectors and electricity. This section also includes any required work or improvements to be undertaken by the tenant.

Before signing a lease, it is crucial to thoroughly inspect the premises and document any existing damage or maintenance issues. This will help avoid disputes with the landlord when it's time to move out. Take photographs, create a checklist, and ensure that any necessary repairs or improvements are clearly outlined in the lease agreement.

Be Aware of Landlord and Tenant Work

Typically, the lease stipulates that the landlord will provide the tenant with a premises that has basic work already done. It will outline the specific tasks the tenant is responsible for completing in order to commence operations and open for business. Understanding the division of responsibilities for both the landlord and tenant regarding construction, renovations and alterations is vital. Clarify who is responsible for what, as well as the approvals and permits required for any modifications to the premises.

Understanding Rent, Additional Rent and Percentage Rent

Commercial leases usually include various components that contribute to the total rent. These consist of the tenant's pro rata share of CAM charges, real estate taxes assessed on the entire project and landlord's insurance premiums for coverage on the entire project — all of which the tenant is responsible for paying. The lease will also spell out the consequences of missing a rent payment. 

Franchisees should have a clear understanding in writing of what constitutes additional rent. Percentage rent may also apply, where you pay a percentage of your gross sales to the landlord.

The Utilization of the Security Deposit

Every lease includes a section detailing how the security deposit will be used. Generally, the clause obligates the tenant to maintain the deposit amount, allowing the landlord to access it partially or fully for rectifying any breach committed by the tenant, such as damages to the property or unpaid rent. 

Understand the terms governing the security deposit, including when it will be returned and under what circumstances the landlord can retain all or part of it. Be aware of any restrictions on using the security deposit as a rent credit or for other purposes.

Maintenance and Repair Obligations

The landlord will also provide explicit instructions regarding the tenant's maintenance and repair obligations. Generally, the tenant is accountable for upkeep and necessary repairs of all systems within the premises. This includes but is not limited to electrical, plumbing, heating and air conditioning systems. 

Ensure that you understand your obligations as a tenant and the landlord's responsibilities for major structural repairs or maintenance of common areas. Having a clear understanding of these obligations can prevent disputes down the line.

Elements of the Common Area

This section will specify the elements encompassed by the common area, walkways, parking lots, stairwells, lobbies, hallways and elevators. It will clarify that all expenses related to the maintenance, repair and replacement of these items will be incorporated into the CAM cost. Know what constitutes the common area and how it is maintained.

Utilities You Are Responsible For

Lease agreements may specify which utilities, such as water, electricity or gas, are the tenant's responsibility. It is important to understand these utility provisions and estimate the associated costs accurately in your budgeting.

What Insurance You Need

Additionally, the landlord will allocate to the tenants, proportionally, the expenses incurred for insurance premiums covering the entire project. The tenant will be obligated to obtain designated insurance policies, ensuring coverage for their franchised business operations and protecting against any potential hazards or losses.

Reviewing the Lease Carefully

Under the terms of the agreement, it's the franchisee who will ultimately be responsible for understanding the lease and performing under its terms. That’s why it is always very important to read the whole thing carefully, keeping a minimum of these 10 points in mind.