Specialist advice

Property leases

Help your franchisees save money through their lease agreements

It has been well documented that the commercial property market has seen difficult times over the last three years and, although there are signs of recovery, it is widely anticipated that the difficult times will continue into 2012.

These market conditions are clearly an advantage for those franchisees entering a new lease, but it also offers an opportunity for existing franchisees by being proactive and committing to longer leases well before a lease event such as a break or lease expiry.

With typical franchise agreement lengths being five years with five yearly renewal periods, many franchisees have ten-year leases with the option for a tenant to break on the fifth anniversary or simply five-year leases.

If the lease can be extended or a break option removed, the landlord will benefit from certain income over a longer period and, with it, an increase in the value of the property asset. If the franchisee believes the property will continue to meet their requirements, they should consider entering into a longer-term commitment by either removing a break option or extending the lease period.

In exchange for this commitment, the landlord will typically provide an incentive in the form of a rent-free period or annual rental in line with the present market rates. The level of incentive will depend on a number of factors; the length of time before the lease expiry, the current level of rent compared to the market rent, the proposed extension to the lease period and occupancy rate on the landlord's portfolio or within the landlord's building.

For example, if a franchisee occupies a retail premises on a five-year lease expiring on 31 December 2012, in return for the franchisee entering into a reversionary lease starting on the expiry of the current lease and expiring on 31 December 2017, the landlord may grant a six month rent-free period upon completion of the documents. The landlord is guaranteed a further five years worth of rent and the tenant receives six months rent-free and certainty of occupation for the additional franchise term.

Alternatively, a franchisee may have a ten-year lease with a tenant's break option on 31st December 2012. If they have already agreed to extend their franchise agreement, trading from the same premises, by offering to remove the tenants break option the landlord may again grant a six-month rent-free period in return.

Many franchisees are not aware of the key dates (often missing the notice period), and do not appreciate the value of break clauses and lease renewal options or when to approach their landlord.

Robert Dick is Managing Director of Cirrus Tenant Lease Services. You can contact him on 01865 487 210.