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Lease Options For A New Restaurant

C-Lovers require that you operate out of a retail or commercial location. We will assist you in finding the right location that matches our site criteria. Due to these circumstances, you will have to enter into a head lease agreement. It is important that you understand the agreement and contractual relationship that you are entering into.

Lease Options For A New RestaurantWhat Is A Head Lease?

A head lease is where you are in a direct contractual relationship with the landlord. As the franchisor, we require that such lease documents and the location are approved by C-Lovers before signing. We want to ensure that it is a viable location and that the terms are reasonable. However, it is important to note that C-Lovers’ approval of the site does not represent or warrant the success of the location. We cannot predict your success as there are many variables which will affect your business.

Why Sub Lease?

In some circumstances, although rare, the franchisee will sublease the space from C-Lovers, with C-Lovers possibly on the head lease with the landlord. This is done when the franchise’s success is very location driven or where the landlord requires a strong covenant. A sublease arrangement allows the franchisee to have access to locations that you might not have access to otherwise. C-Lovers will retain control over the site by entering into a lease directly with the landlord, and then sublease the location to the franchisee on principally the same terms and conditions.

What Is A Tripartite?

A third situation is where the franchisee goes on the head lease and there is a three-party, or “tripartite” agreement. Such agreements are between the landlord, franchisee and C-Lovers. In the event that the franchisee is in default of the lease C-Lovers would have the right to cure the defaults or take over the location. Depending on the agreement, it may also allow C-Lovers the option to  assume the lease in the event that the franchisee decides not to renew at the end of the lease term or if the franchise agreement is terminated. From a franchisor’s perspective, this gives us the ability to control the location without the obligation and liability. However, from the landlord’s perspective, it limits their options and thus landlords are reluctant to sign three party agreements. They often want to have flexibility to rent the space to someone else in the event of default.

These three different leasing options are a function of balance between control and risk. A franchisor will typically have a “cross default” clause in the franchise agreement stating that a default in the sub-lease or lease agreement is a default of the franchise agreement.

What Are My Obligations?

Regardless of whether you are on the head lease, sub lease or a tripartite agreement; be sure that you fully understand your legal and financial obligations under the lease. Typically the total occupancy costs are different from the base rent that is quoted. Be sure you budget for the total occupancy costs for the space, and not just the base rent. Total occupancy costs will often include the following.

  • Base Rent– Usually quoted on an annual cost per square foot.
  • Percentage rent. Some landlords in high traffic retail locations will request a percentage of your gross sales.
  • Property tax. Typically you will pay your portion of the property tax, based on your square footage.
  • Common Area Maintenance (CAM)– The businesses share of such costs as security, snow removal in the parking lot, cleaning services of the common areas.
  • Merchants association or marketing fund. Large shopping malls or complexes will have tenants share costs for mall promotions and events, again the amount allocated based on your square footage over the total amount of leased square footage.

Your rent payments are typically paid monthly directly to the landlord, with certain items, such as property tax, paid annually, and the merchants association or marking fees often paid quarterly. In sublease arrangements we may require that you pay C-Lovers directly and then C-Lovers pays the landlord. In these cases we will give you clarity as to whether or not we are charging a fee or up-charging for being on the head lease. The reason behind this potential additional fee is because C-Lovers is taking on the added liability for you to access a great location.

It is important that you fully understand your obligations under the lease or sublease agreement. Have a lawyer review and explain the documents to you before signing. Once you are open for business, work at maintaining the relationship with your landlord and franchisor so as to avoid difficulties down the road. If you foresee problems in making lease payments, don’t hide the fact. Instead communicate the issue with both the landlord and franchisor so that there are no surprises and work with them to find solutions for payment.

Wayne Maillet Restaurant Franchise Opportunity SpecialistWritten by Wayne Maillet, president of Franchise Specialists. Wayne is a leading Canadian franchise management consultant and published author of the book Franchising Demystified. You can order the book athttp://www.franchisingdemystified.com/
Wayne Maillet can be reached at 604-941-4361