Real Estate Leases Part I: The Hunt

Whether you love real estate or not, the hunt to find the “right” space is critical.  

While most have heard the “Location, Location, Location” refrain, the hunt itself obviously depends on many other factors than mere location.

One of the biggest controlling factors is what the lease itself says.

Commercial leases can range from one page, a likely inadequate document, to over 250 pages, which is usually excessive.  Remember that no outside or spoken deals matter to a court or arbitrator resolving a dispute years later. Get everything in writing.

Until you hear the results of your lease review, a task that usually takes 3-5 hours for a lawyer to complete depending on the length, plus another hour or so to discuss it with a client, you won’t know what potentially disadvantageous terms exist in the lease that would make you not want to sign it. And believe me, there will always be “bad” terms.

Therefore, it is recommended that while a lawyer reviews the lease for your “dream space,” you should keep hunting for another space.

Two Key Reasons to Keep Hunting:

(1)  You have not let a week or more go by without seeing more properties if the landlord refuses to negotiate any changes (or the changes you really want).

(2) Leverage. To be in the best bargaining position, you have “play hard to get.” If the landlord perceives that you are too interested or too desperate, the landlord will not negotiate as much and you will lose out. Continuing to visit other properties increases your leverage by making you able to walk away.

Consider Using a Quality Commercial Broker.

Working with a commercial broker to manage your hunt, is also recommended. Many potential tenants I meet do not realize that the landlord will pay your commercial broker’s fees, making this a free service for you as a business owner. I or any other experienced lawyer can easily connect you to a quality broker whom we know will serve your interests.

A commercial broker also makes it easier to keep looking after you have one lease in for review and of course helps find properties that suit your needs likely better than you could on your own.

While insisting to tour other properties increases the broker’s workload, it will lead to you and your business finding the best property for you and any experienced broker will understand this.

Take Away Points:  Have a lawyer experienced with commercial leases review your potential lease. Frequently, landlords will negotiate many provisions, but in case yours won’t, remember to keep hunting for another space that will suit your needs. If you are unfamiliar with commercial real estate, enlist a commercial real estate broker to represent you – they are free to tenants. But know that a broker cannot legally rewrite your lease –only a lawyer can.

Laura Liss represents general business and franchise clients alike in business, employment, and real estate transactions at her own firm, the Law Office of Laura Liss, P.C. (www.lauraliss.com). When out of the office, she enjoys networking, Mexican food, and hiking in the foothills. She can be reached at laura@lauraliss.com, on Twitter @LauraLissLaw, or on Facebook at facebook.com/attorney-laura-liss.

Real Estate Leases: Can’t Live With (or Without) Them

Over the coming weeks, this blog will explore different parts of standard commercial real estate leases in a series of posts.

We will discuss what many of those clauses drenched in “legalese” really mean, and why as a business owner, you should care.

But for now we ask you: What have your commercial real estate experiences been like? What do you know now that you wish you knew then?

We look forward to hearing your stories and sharing with you over the coming weeks!

Franchising Fridays - Is Your Licensing Agreement Really a Franchise? And What Are the Consequences if It Is?

This post originally appeared on the blog of the Denver Bar Association Young Lawyers Division, of which author Laura Liss is a member and guest author. Check out the DBA-YLD blog for posts on all kinds of legal issues, not just business and franchising matters. Now, on with the show!

A franchise is, at its core, a licensing agreement.

So what morphs a commonplace licensing agreement into a franchise?

A license becomes into a franchise when:

(i)            One grants another the right engage in a business;

(ii)          Using the grantor’s brand identification (e.g. logo, registered or unregistered trade/service mark, or advertising);

(iii)         Subject to the grantor’s significant control or assistance (such as a training program or coaching); and

(iv)         The grantee pays more than $500 to enter into or continue the relationship.

While all the above elements are necessary, the grantor’s significant control or assistance and the use of common branding are what usually push a licensing agreement into being a franchise. When evaluating a licensing program, consider whether the above elements actually create a franchise out of the licensing agreement you are reviewing.

If It Is is a Franchise, Federal and State Franchise Laws Apply.

The Federal Trade Commission’s (“FTC”) Franchise Rule applies in all 50 states and many states have state-specific franchising rules.  The most fundamental rule requires the preparation and delivery of a Franchise Disclosure Document containing hundreds of pages of required disclosures that must be given to the potential buyer within a specified time.  State and FTC enforcement of these rules can be harsh.  Fines, refunds, buybacks, and awards of attorney’s fees are routine if a Franchise Disclosure Document is not prepared or delivered as required.

When Do State Franchising Laws Apply?

These state laws may be triggered if any the following occurs in a state:

(1) The offer originates, is received, or is accepted in the state;

(2) Meetings between the franchisor and prospect occur in the state;

(3) The franchise business location will be operated in the state or any part of the territory will be in the state; or

(4) The prospect is a state resident.

Consider this example: North Dakota resident meets Colorado franchisor (your client) at a trade show in California. The North Dakota resident later accepts the offer to buy a your client’s franchise, the territory of which will be located in Washington.

This example could require your client’s compliance with four sets of franchising laws: North Dakota, California, and Washington state-franchise law, in addition to federal franchise law that applies everywhere. Note that Colorado does not have its own state-specific franchise laws.

Take Away Points: Discuss licensing agreements carefully with your client (or your lawyer if you're the client) to discover if the business model may implicate a franchise based on the above elements. Frequently, there are strong business reasons to expand the business through franchising, namely the influx of someone else’s capital into the business. If you are unfamiliar with the franchising laws, consult with a franchise attorney when evaluating or structuring a potential licensing or franchising program to make sure the program and documents are done correctly.