Franchising | November 2010 | By Marilyn Odesser-Torpey

Step One for Lease Two

Negotiating a lease for a second location is like planning for a second marriage: The ground rules are similar, but you’re still starting all over. Attorney Randall Airst offers some tips to help protect your interests.

Operators opening a second unit must start over when negotiating a lease.
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Q: I was able to successfully negotiate a lease for my first location. What should I expect with my second lease?

There is no standard lease agreement. Whether or not you have negotiated a lease before, you have to carefully review everything and can’t assume anything. Three important things to keep in mind: all leases are different, everything is negotiable, and there are dozens of important lease terms, each of which can contribute to your business’ success or burden you with challenges that may be difficult or even impossible to surmount.

For example, we’re working with a restaurant tenant who invested about $2.5 million in tenant improvements. After almost five years, the landlord terminated the lease when the tenant fell six weeks behind on the rent. The premature termination could have been prevented with some tenant-friendly lease language. Despite termination, the tenant remains personally responsible for the repayment of $1.4 million in loans. We are trying to negotiate an amicable resolution. However, burdened with landlord-friendly lease language, negotiations are an uphill battle. The best time to secure favorable terms is before the lease is signed, when the landlord has a vacant space, generating no income.

Before you search for a second site, talk to your first location’s landlord. Assuming a good relationship, the landlord might be willing to provide concessions on additional locations and eventually work with you to develop a standardized lease template. This type of template, used by many large restaurant chains, can dramatically reduce the issues subject to repeated negotiations.

Whether you’re dealing with the same landlord or a new one, you can reduce personal exposure by making your new restaurant—and any subsequent ones—a separate corporate entity, like a Limited Liability Company (llc) or Limited Liability Partnership (llp). When each location is owned by a separate entity, it helps prevent one bad apple from spoiling the bunch.

Speak with your accountant and lawyer about forming new entities inexpensively. These professionals can also ensure that the new entities are consistent with your tax planning, estate planning, and other activities.

Also, don’t agree to lease provisions that negate the benefits of the LLC or LLP. For example, many restaurant operators personally guarantee lease obligations to their landlords. Even when a landlord insists on a personal guarantee, more tenant-friendly alternatives are available. A consultant with expertise in retail leases will know what to look for and how to protect you, while at the same time satisfying the landlord’s interests. More tenant-friendly alternatives are available for many lease provisions, including relocation, common area maintenance, assignment and sublease, and more.

Use your first location as leverage to negotiate the terms you want for the second lease. You already have a good operation and credit history. That makes you an attractive prospective tenant for many landlords. So get out and talk to several landlords, find out what terms they are offering. This includes owners of locations that are not your first choice. Then go to the landlord of your preferred property and tell him that you have been exploring alternatives. Before you do this, make sure you have those alternatives lined up. Even if you’re facing Attila the Hun, he has no leverage when you can choose from options that feature better terms. A single attractively priced alternative can turn the whole negotiation on its ear.  

“Even if you’re facing Attila the Hun, he has no leverage when you can choose from options that feature better terms.”

Even if the landlord says that he has four other prospective tenants lined up to look at the space, stand firm. In this economy, time is on your side, not the landlord’s. The longer negotiations drag on, the greater the chances that you’ll come up with a more attractively priced alternative.

Here’s an example: We are negotiating a lease for a restaurant in a major downtown office tower. The landlord had previously asked for rent as high as $55 per square foot. A few weeks ago, the landlord came down to $45, but asked the tenant for some other concessions, which the tenant was thinking about providing. However, a viable alternative for less than $45 was uncovered. With the alternative in hand, the tenant was able to take a much firmer stance, refusing to agree to the requested concessions.

Five years ago, malls and shopping centers were financially stronger than they are today. Now many are confronting serious challenges, including high vacancies and low rental rates. Further, vacancies take a long time to fill and prospective tenants may insist that the landlord provide incentives such as free months and money toward tenant improvements. To make matters worse for landlords, an increasing number of the large chains they have traditionally been able to bank on as anchors or junior anchors are themselves experiencing serious financial challenges. Some are even shedding leases.

You can also use the success of your first business and the present economic situation to help you move up from a B-plus-level property to an A-level one. As a healthy business, you are more important to the landlords than ever before. That means you have a strong hand when it comes to negotiating lease terms. Develop options. Make landlords compete for your business. And don’t miss this opportunity to lock in a 10–12-year lease on those A properties. You have the leverage now. Use it.