If your business operates out of bricks-and-mortar premises you’ll need a lease.
“Franchisors should help with the lease negotiations,” Sully says. “Their experience will far outweigh your own if you haven’t done this before. Generally, the franchisor will include this as a development cost within the overall investment.”
The head lease
The person who holds the head lease signs the contract with the landlord so they are legally responsible for meeting all of the terms. This could be the franchisor, who then sub-lets to the franchisee, or the franchisee themselves.
Should the franchisor hold the head lease?
- Franchisors can often negotiate better terms.
- You may not have responsibility for repairs and maintenance.
- You don’t need to spend time in negotiations or dealing with any problems.
- You have no right to deal directly with the landlord, which can be frustrating if the franchisor is slow to act on a problem.
- If the lease doesn’t allow the franchisee to grant you a sublease you may need to make a formal application, which will add to your costs.
- You may still be named as personal guarantor and required to provide a bank guarantee or security deposit.
- If the franchisor fails to negotiate an option to renew you could be left without premises.
Things to look out for
- What condition will the store be in when the landlord hands it over to you?
- What are the fit-out costs?
- What will the rent be towards the end of the lease?
“You need a clear understanding of the sales you’ll need to run a profitable business three to five years down the track,” Sully says.
If you don’t align the length of your franchise term with the term of your lease you might find yourself having to pay rent with no business to run. Or, if your lease expires early, you could have a business with no premises.
Red flag moment
It’s wise to get specialists to review any documentation from a legal and financial perspective. “Specialised professional advice may seem expensive,” says Robert Toth, Special Counsel at Sanicki Lawyers. “It’s important not to forget it could make the difference between a successful business and losing your life savings or your home.”