How to Negotiate the Lease For Your Franchise Storefront or Office Space

Welcome to another episode of Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Atlanta Franchise Today is dedicated to bringing entrepreneurs and business owners the best practices and tips for their franchise goals. On today’s episode, Leslie is joined by Nancy Lanard, Founder and Senior Partner of one of the top franchise law firms in the country representing franchisees. Nancy is an expert in addressing the legal aspects and concerns of retail leases and franchising.

Transcription: 

Leslie Kuban:
Nancy, it’s great to have you, welcome to the show.

Nancy Lanard:
Thank you so much, I’m excited to be here.

Leslie Kuban:
So Nancy, for our viewers who are just getting to know you for the first time, tell us a little bit about you and your background. How did you get into franchising and real estate law?

Nancy Lanard:
Well, a long time ago, about 25 years ago, I was in house council to Nutrisystem. And Nutrisystem, at that time, was the number one weight loss company in the United States, with 1800 locations, 1300 of which were franchise locations, 500 corporate. And I was in charge of the 500 corporate leases around the country, so that’s how I got involved both in franchising and in the commercial lease as a tenant attorney.

Leslie Kuban:
Many times over it sounds like.

Nancy Lanard:
Many times over is correct.

Leslie Kuban:
So, there’s a lot to commercial leases, and there’s multiple parties involved. With franchising, there’s the role of the franchisor, there’s the role of a commercial real estate broker, and there’s the role of the attorney. Can you spell that out for us? Who is responsible for what?

Nancy Lanard:
Absolutely. So, the franchisor is the person who is going to help you find the location, and a good franchise system has a national broker system and usually, local brokers that they can connect with who understand the brand, understand the business, and may have some demographic studies as well to help them figure out who is their perfect customer so that they know the locations to be looking in. The broker will also help the franchisee/ potential tenant with negotiating the business terms, and those will be things like the rent and square, footage and the term, and maybe tenant improvement allowance, and for the build out, and renewal rent and renewal term, and those kinds of things. Those business terms, once finalized and agreed upon by both sides, are memorialized in what’s called a letter of intent, otherwise known as an LOI, and that LOI, which is usually three to five pages in duration, will specify those business terms.

Nancy Lanard:
However, it is stated to be non-binding, but be careful because although it doesn’t create a contract by itself, those terms are usually held to be binding by the landlord, so if you’re not comfortable with whatever that LOI says, don’t sign it, wait and have some of those terms negotiated when we get involved down the road. Once the LOI has been finalized, the landlord hands that over to their attorney to draft up a 30 to 80 page typically a lease, and that lease will have all of the other terms in it as well. And by the way, you’d be amazed how many times those terms of the LOI that are favorable to the tenant, aren’t even in that lease, so we always check that very carefully. But the lease negotiation involves everything else. We don’t usually get involved in the rent and square footage, because those are things that are very local that the broker has helped you with, but it’s everything else. It’s adding clauses, such as reps and warranties from the landlord.

Nancy Lanard:
And an example of that might be Americans with Disability Act compliance, so that if somebody’s coming into your business and they’re in a wheelchair or on crutches, and there aren’t enough handicapped parking spots or the curb cut is too steep, that representation warranty can help with that, and negotiating and limiting the remedies the landlord has, if you’re in default and giving lots of notice and opportunity to cure the default. We make sure also of course, that the franchisors requirements, like the lease writer, are incorporated into that lease. So, those are the kinds of things that we get involved in. It’s everything else, making sure that you can, down the road, if you want to sell the business, to sign that lease to another franchisee to your buyer, and negotiating all of the rest of the clauses in that lease. And the franchisor gets involved towards the end.

Nancy Lanard:
So, although some franchisors actually do have a real estate department. If they’re more established franchises, they typically will have a real estate department. That real estate department will have somebody who will get involved in every step of the lease, all along, from start to finish, in helping with everything, and which is great. We encourage that, but if not, we certainly make sure that the franchisor approves that lease in the final step. Usually, they also are involved in the site selection process, and approve the site before it even gets to us.

Leslie Kuban:
And Nancy, is there a typical timeline associated with all of this, A to Z?

Nancy Lanard:
So, if everything were to go smoothly in a lease, you’re talking about from start to finish, finding a location to signing and so forth. So typically, from finding a location to opening, we would estimate six months. It takes time to find a location. It takes time to negotiate those business terms. Landlords are notoriously slow, and I’ve never figured out why, and their attorneys are just as bad by the way, and even during the recession in 08, 9, and 10, we had landlords with shopping centers that were half vacant and they still moved at the snails pace, and I don’t even know why. And their attorneys did as well. So, depending on the landlord, it could take you a lot longer or it could take a lot less, because generally speaking, they just move very, very slowly.

Nancy Lanard:
We try to respond very quickly. So, from the time that we’re retained, we ask for five business days to review everything, the lease and the LOI and so forth, and mark it up, and then we schedule a call with the client, which is usually about a three hour call to go over everything.could be even longer. And then make sure that all of the clients concerns are incorporated into the lease and that they understand what the lease says, and then we send our rent line on to the landlord. Landlord could take three weeks right there, after sending that on. And once we get comments back from the landlord, we try to reply same day or the next day. So, we try to keep the ball rolling, which is why many, many, many brands actually recommend us as the firm for their franchisees for leases nationwide, and we love that, and it’s because we try to keep things moving as quickly as we can, and-

Leslie Kuban:
This is a really good point Nancy, that I think prospective franchisees, especially if they’re looking at this for the first time, really need to know that there is quite a bit of hurry up and wait when it comes to responsiveness, especially from these large national real estate companies that may be handling thousands, and thousands, and thousands of other projects. So, I think people need to build that into their timeline and just expect it’s going to take longer than anyone might hope.

Nancy Lanard:
And it can take a long time just to even find a good location. I have clients that try for a couple years to find locations. I mean, that’s not ideal obviously, and then I have other clients that while they’re having us review their franchise agreement, have already found a location for the business. So, it runs the full gamut, but yes. Six months, start to finish, is when things go smoothly, because then you have to get permits. You have to have a contractor, they have to do the build out, and we all learned from 2020 that you can’t predict how smoothly anything’s going to go. And right now everything’s backed up. Everybody’s understaffed, so who knows, can you even get the products that you need to have the build out?

Leslie Kuban:
So Nancy, are there two or three common points, just low hanging fruit items for you as a real estate franchisee attorney, that you are commonly negotiating on behalf of your franchisee clients?

Nancy Lanard:
Well, my answer to that is pretty broad, because it’s pretty much everything in that lease, but I will tell you some very key points are, besides incorporating the franchisors requirements, which most franchisors, have a rider that must be incorporated into the lease, but there’s also assignability. Down the road you want to sell the business. Can you do that? Is the lease assignable in this business? So, you want to make sure that your client, the tenant/franchisee, has the ability to freely assign that lease to another franchisee or to the franchisor without really any, or certainly too many, conditions or costs involved, because that can hold up the deal. I had one client of mine who was selling two businesses at the same time to the same party, and the deal was that they both had to go through together.

Nancy Lanard:
And one, I didn’t handle the leases for him. And one of the leases, the landlord was easy, it was done. We could have closed four weeks after it all started. The other one held up the deal. The other landlord held up the deal for six months, which held up all the deal, the whole deal, both of them. So, that’s very, very important. Another really important clause in a retail lease, is relocation. So, imagine that a landlord can freely relocate you anywhere in that shopping center. You’ve picked out your ideal spot, and you have great traffic flow. Maybe you’re looking for foot traffic. Maybe you’re looking for visibility from the road or great parking, easy access, whatever the reason is you picked a particular spot, and with a relocation clause, which most landlords want to throw in there, they can move you anywhere they want in that shopping center, which may have less signage, less visibility from the street, less accessibility from parking lot and so forth.

Nancy Lanard:
It just may be horribly detrimental, and it’s detrimental anyway, because you’re going to be closed for some period of time. And if you’re a seasonal business, for example, you’re weight loss, that was my background, right. So, if you’re in the weight loss industry, your season is January 1st, right when you’re making that New Year’s resolution, until the end of bathing suit season, because you’re certainly not worried about weight loss during this time of the year where it’s Thanksgiving and Christmas and New Year’s. You’re eating.

Nancy Lanard:
So, you don’t want to have to be relocated during your peak season, and so there’s a lot to that clause as well. It’s very, very important. So, we talked about assignment, we talked about relocation. I think even what’s included in what’s called, triple net. So, in a commercial lease, triple net means that a tenant is going to be paying the landlords their unprorated basis based on their square footage. The landlords cost for maintaining those common areas, the parking lot, the roof, the common walkways, the public bathrooms. But what’s included in them? The triple net stands for taxes, insurance, and operating expenses.

Nancy Lanard:
So, what’s included in those operating expenses? Well, I’ve seen some landlords try to pass through a 15% or 20% charge just for their own administrative cost. Well, that’s ludicrous. We have an exhibit of 28 items that we exclude from the operating expenses, and as part of that triple net negotiation. So, everything in a commercial lease is very important to negotiate, and really can make a huge difference, but on the bottom line and of course coming out of COVID, we also have a pandemic clause that we’ve now added to our leases that say that if there is another government closure, for whatever reason, that they can abate rent. Means stop paying the rent, or at least, defer it. Which was a huge issue in March of 2020.

Leslie Kuban:
Are you finding lessors agreeable to those new terms, given that we have this thing that we have to deal with now called a pandemic that none of us had before?

Nancy Lanard:
Right. Some more than others, it depends. Everything in negotiation depends on how great the location is. If it’s so desirable that they have 20 people lining up for the same space, obviously, it’s not going to be as easily negotiable. If it’s a space that has been vacant, and not as much in demand, than of course, it’s more negotiable. So, it really varies.

Leslie Kuban:
Nancy, are there a couple deal breakers, no matter how great the location, how great of a spot that would be for a franchisees business, just things that you would say, ”don’t do it”, if they’re not willing to negotiate?

Nancy Lanard:
I rarely say that, because it’s really a business decision that a client has to make for him or herself. But if it were me, and I will say it in that term. If this was my lease, and I try it at myself in my client shoes, if it were me, I certainly, would never, ever agree to an unlimited personal guarantee. So, imagine having a 10 year lease, and your rent might be whatever it is per year, and at the end of the second year can’t make a go of it. Now, you’ve got eight years of rent that you have personally guaranteed.

Nancy Lanard:
Now, they can come after your cars, your house, your bank accounts, and everything else, and that could be millions of dollars. So, that’s something that I wouldn’t be too happy agreeing to. A lot of people walk away because a spousal guarantee is required, and I understand that. If the spouse isn’t involved, why would you do that? But, from the landlord’s perspective, I also understand, because most married couples own their assets jointly, and if you only have one personal guarantee, you can’t go after the joint assets. So, I do get it, but I also understand the other side. So, as far as drop debt issues, that would probably be mine. That personal guarantee.

Leslie Kuban:
And now switching over and putting on your franchise attorney hat. These questions about spousal guarantees, personal guarantees, they show up in every franchise agreement I’ve ever seen and in leases too, and that usually is a little bit surprising to people who are new to this. Do you find there are opportunities to limit it or soften those particular provisions in franchise agreements and in commercial leases?

Nancy Lanard:
It’s really interesting you asked me that, because about two years ago, I had a very, very experienced franchise consultant ask me a question that they said they had a matter that was near in conclusion, but the franchisor was requiring the spouse, who had just inherited a tremendous amount of money, sign a personal guarantee, and did I have any suggestions because she absolutely wouldn’t sign it, and the whole deal was going to be blown up.

Nancy Lanard:
And I did have a suggestion. I suggested a letter of credit might be an answer. I mean, we did some brainstorming together on it So, I understand where the franchisor is coming from. As I said, if they’re joint assets, then you can’t go after them if you don’t have that spousal guarantee. The other side of it is this inheritance isn’t a joint asset, so it should be a carve out. No matter what, that should be a carve out from it. So, that’s how I would handle it, carve it out, carve out any personal so that any spousal guarantee really only includes joint assets. I mean, that’s really how I would… Unless the spouse, of course, is involved in the franchise, which is, of course, a different story. Then they have every right.

Leslie Kuban:
Well, you sure know your stuff Nancy. That’s for sure. And I’m going to brag on you a little bit. For our viewers, Nancy’s firm is an award winning, many times over, very well respected firm in the space of franchising. Maybe tell us a little bit about your firm Nancy, a little bit more.

Nancy Lanard:
Absolutely. Well, we’re an all female firm, first of all. We are seven attorneys. We’re all female, and interestingly, we are all virtual. And I have attorneys who, literally, are physically located in south Florida. I have an attorney physically located in Texas, licensed in those states, and attorneys in Pennsylvania, but in different parts. I mean, our offices are in suburban Philly, but attorneys licensed in California and Georgia, in New York, New Jersey, and they’re located in different parts of Pennsylvania as well as the two that are out of state. One in Texas and one in Florida. So, it’s an unusual law firm, and we are exclusively a franchisee law firm. So, we don’t represent any franchisors. We never have a conflict of interest because of that, and been doing this a long time, and I love it.

Leslie Kuban:
And I believe you charge flat fees? Am I remembering that correctly?

Nancy Lanard:
You are remembering absolutely correctly. Yes, we charge flat fees for everything except resales. So, for franchise document reviews, for setting up an entity, if they’re not using retirement funds in a ROBS plan, and for the lease, everything is done on a flat fee basis. If it’s a resale, that’s different, that is not, but everything else, yeah.

Leslie Kuban:
And then what we learned today, certainly the fees that people would pay would well offset the savings that they’re going to gain just in negotiating a few points of their lease. That can really impact one’s runway and profitability, and their overall bottom line to their business.

Nancy Lanard:
Yes. Yeah.

Leslie Kuban:
That’s a clear takeaway. Well, Nancy, it’s been a delight to have you on the show today, and before we wrap up, how would a prospective franchisee or existing franchisee get in touch with you?

Nancy Lanard:
So, call me. My number is (215) 392-0030. I’m extension 101, please call me. Or, my email is N as in Nancy, Lanard, as in my logo. So, Nlanard@lanardandassociates.com, and please check out my website at Lanardandassociates.com, as well. There’s a lot of great information, both on leases, franchises, resales, entities, so forth. They’re on there, there are videos, and all kinds of blog posts, and articles that I’ve written, and so forth. So, thank you.

Leslie Kuban:
Well, thank you so much for joining us today Nancy. It was a chock-full of very useful information for existing and perspective franchisee. Folks, I hope you found this to be an inspiring and informative episode, and I look forward to seeing you next week on Atlanta Franchise Today.

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