Understanding The Basics of Your Lease in a Retail Franchise Business

Written on the 10 November 2010 by Glenn Walford

Retail leasing can be a complex field for even the most experienced leasing professionals. If you are evaluating a franchise that requires a retail lease over premises, in most cases your franchisor will have suitable experience, or, will engage experts to secure an appropriate lease. Regardless of the experience and competence of your franchisor, it just makes sense that you should make an effort to understand some of the key aspects to their lease. After all it’s your profitability at stake. But the mere mention of the word ‘leasing’ to some people can make them run for the hills! Phil Chapman, a retail leasing specialist who acts for numerous franchise systems, has been able to focus on the critical aspects to a retail lease that every franchise owner should try to become familiar with.


 

The Detail

The key detail in a lease that most people are primarily concerned about are the term or length of the lease, and the rental amount. Clearly, these are important aspects to the lease, but you need to be well aware of some other key terms and details as you build your understanding of a lease:

• Turnover Rent – also known as percentage rent, is where the lessor (landlord) seeks to share in the success of your business through another tier of rental (on top of your agreed minimum base rent). It is calculated on the turnover that exceeds a certain breakeven point
• Annual Rent Reviews – lessors will seek to have a rental increase every year. Driven by a need for growth in their own investment they often seek increases higher than inflation (CPI). For example, the increases can be in the form of CPI +1% or as a fixed percentage like 5% annually
• Permitted Use – this sets out what your business can sell from the premises and may even identify particular things that your business can’t sell. Permitted use has to meet the future needs of your business over not just the first term of the lease but also in the case of multiple options on it, which can be in excess of 10 years
• Fit Out Design – lessors engage designers to ensure your store fits with current trends and design principles for an overall modern and attractive look for the centre. This push for innovation is however at your cost so must be watched
• Make Good Provision – at the end of your lease (if not renewed) you will be required to remove all the fit out works including tiles, walls, ceiling and more, to return the premises in the same condition it was handed to you. This can cost a significant amount of money depending on the works required.


 

Getting The Right Lease Deal For You
 

You may be in a business that needs a lease to operate, but the way franchising works, you may not even be a signatory on that lease. Your franchisor may sign the lease and then give you a license to operate and occupy the premises. It is split roughly about 50/50 at this stage on the number of franchisors holding the lease or franchise owners holding the lease of franchise businesses. Whatever your particular scenario as you look at a franchise, make sure you have an understanding of your lease and don’t leave it all to your franchisor. Also be aware that:

• You may have the right rental amount today but allowing a higher annual increase compounding over the term will hurt your business
• Taking a higher rental initially in return for rent incentives like fit out contributions, means you are accepting a higher rental now that compounds over a number of years. When it comes time to renew you are already coming off an overinflated rent and landlords want increases
• Not to lock into a high fixed annual increase of 6% or more for example, when the alternate is CPI +1%. It is a judgement you ultimately need to make with advice, but being aware of CPI amounts over time should dictate the decision.

To give yourself the best chance of getting your lease right, do your business projections properly with advisers and match your type of location up with similar ones operated by your franchisor. See how they compare against the turnover projections of your business.

Never rely on gut feel and take the emotion out of your decision-making when it comes to your lease. Phil Chapman’s saying when it comes to your lease is RESEARCH IS MANDATORY.

For more information, or to get a copy of ‘Buying Your Franchise’ that Phil Chapman and many other franchise specialists appears in, go to www.ShakingFranchiseProfits.com.au