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An introduction to franchise leases and locations

By Roma Ihnatowycz

When it comes to finding good real estate, it’s all about location, location, location. Choosing the right location could mean the difference between a successful, profitable operation, and one that stumbles along and closes shop a few years later.

How exactly is a location search conducted for a new franchise? This depends largely on the company. Some franchisors delegate the responsibility to the franchisee, providing them with a comprehensive list of key criteria to direct them.

More often, however, the responsibility for finding a location is taken on by the franchisor. They take the lead in the property search, presenting the franchisee with their selection once the initial legwork is done. It’s a scenario that allows the franchisor to bring all their expertise and know-how to the table.

Pro-active approach

This is not to say that a would-be franchisee should sit idly back, blindly following the franchisor’s lead. They need to agree to the selected location and do their own research to determine their comfort level. They can also suggest locations to the franchisor during the search.

For franchisees tasked with finding their own location, they will first need to obtain a checklist from their franchisor outlining recommended specifications for the site. They will then need to seek out the services of a real estate broker working in the commercial or franchise sector, or possibly even a specialized consultant that can guide them in the overall process.

Lease negotiations

Whether the location is ultimately chosen by the franchisor or franchisee, both parties must agree on the site before a lease agreement can be signed, which is the next stage of the process. While lease agreements can vary in infinite ways, most fall under one of two categories. In the first, a head lease, the franchisor negotiates a lease for the premises and enters into a head lease with the landlord. They then sublease the space to the franchisee. In the second, the franchisee leases the space directly from the landlord.

Historically, the head lease was the preferred option for franchisors, and the one that made up the bulk of franchise lease agreements. More recently, a shift has been observed in this trend, however each franchise system is different and a variety of considerations are balanced to determine which arrangement will be used.

Regardless of which party negotiates the lease, franchisees should always seek legal counsel to review the agreement fully – ideally with a law firm specializing in franchise law. Their lawyer will need to verify that the agreement is in their interest, and flag any clauses or areas of concern. Franchisees should also fully familiarize themselves with the terminology and nuances of lease agreements, and be active partners in the process.

A franchise site search and subsequent lease negotiation is not a straightforward task. It is one made up of layers of complexities. For an optimal outcome, franchisees need to do their research and due diligence, stay actively involved, and rely on a solid team of experts to guide them on their way.


 

Taken from the March/April issue of FranchiseCanada. Check out the March/April 2016 issue of FranchiseCanada, on newsstands now, or you can order your subscription by calling 1-800-665-4232 ext. 224.