8 Things You Must Know Before Leasing Commercial Property for Your Franchise
Becky Martin, writer
Published at 22/01/2018, Updated on 04/05/2022 , Reading time: 7 min
No one ever said that finding the perfect property for your franchise would be easy. Setting up a franchise has many elements to it, but getting the right premises for your new venture can be tough. Even when you’ve found your dream property, the next challenge comes with signing the lease. In this article, we consider why it’s important to think carefully about your commercial real estate options, and then we provide eight top tips to remember before leasing commercial property for your franchise.
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Leasing commercial property - not as simple as you think
Investing in a franchise is costly enough, so you don’t want to add unnecessary expenses to your outgoings by committing to the wrong property deal. However, there is more to signing a commercial lease than simply paying the rent. You’ll also want to think about what will happen if your franchise suffers a downturn, if there are any other costs you’ll be entitled to pay, if the landlord will sort out any repairs to the premises, and if you can alter any of the property, as well as many more considerations.
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Therefore, as you can see, leasing commercial property isn’t quite as easy as it sounds. Remember, you have legal responsibilities as a tenant that you need to abide by (GOV.UK). Therefore, before you sign, you should consult a solicitor that specialises in commercial property. This will be money well spent and will save you a lot of hassle and worry further down the line.
8 things you must know before leasing commercial property for your franchise
As we know, actually signing the lease is just the beginning. Leasing commercial property can be a complicated process if you don’t consider the rent, running costs and provisions in the agreement in detail. A commercial lease can contain over 50 pages of these provisions, so it’s important to understand what it all means (informsurverying.co.uk).
- Length of the lease
The length of commercial leases range hugely, from just a couple of months to 25 years. Whatever term you choose, it needs to be right for you and your business. It makes sense to align the length of the lease with the length of your franchise agreement, which is typically between five and 10 years.
Be careful not to get drawn in by an attractively priced lease, as it could also leave you burdened with an extremely long lease. At the same time, you may actually want the option of extending the lease, particularly if you have spent lots of money on fitting out the property.
A short lease with the option to renew may be a better fit for your franchise, but if a longer lease is chosen, make sure that you can end the lease before the term has expired. If this isn’t agreed ahead of signing the lease, and you want to end the term early for any reason, you may continue to be responsible for paying the rent. This is the case even if you’ve vacated the premises. Now, that’s a franchise cost that would be hard to swallow.
To make sure there is the possibility to renew your lease when its expires, doublecheck that the lease agreement doesn’t exclude your rights under the 1954 Landlord and Tenant Act.
- Cost of rent
When you find the perfect space for your business, it can be difficult to turn down the opportunity of working there, regardless of price. But this is where the head must rule the heart. Your rent is likely to be your biggest ongoing franchise cost, and so you need to ask yourself - can you really afford the rent?
Consult your business plan and determine whether the payment of rent is sustainable based on realistic financial projections, not just the positive outlook. You risk losing everything if you underestimate all the costs involved in setting up a franchise. Your rent is just one element, so it’s wise not to push this payment to your maximum limit of affordability.
Also, bear in mind that it’s likely you’ll pay VAT on top of the rental cost and the lease may include a rent review. Rent reviews are generally carried out every couple of years and, as a result, the cost of your rent should be expected to increase rather than decrease following the review.
You could try to negotiate with the landlord. Despite the majority probably being hesitant to provide a discount, you could ask for a couple of ‘rent free’ months. These periods can actually benefit landlords in terms of VAT or if they need to report a price per square foot to the bank, for example.
According to UK law, your rent price can’t increase more than once every year, and the landlord has to let you know if this is the case.
- Additional charges
Depending on the type of property you’re leasing, you may be required to pay a service charge too. This is generally charged if you’re taking a lease of part of a building. Renting out office space in a larger block, for example, may see the landlord applying a service charge to contribute towards the upkeep and maintenance of common parts of the building. This could include the roof, walls and even lifts or reception areas.
You’ll also be accountable for paying the insurance premium to cover any damage that occurs and any loss of rent that occurs due to the premises being unusable.
- Insurance
An important franchise cost to consider is the protection that insurance will provide you and your business. The insurance necessary to cover the cost of the property itself will usually be paid for by the landlord and then added on to your rent or service charge.
Be mindful, though, that you’ll still have to purchase separate insurance to cover the contents of your commercial property, as well as any additional insurance that’s required for your business. The most common types of insurance those investing in a franchise need are public liability and professional indemnity.
- Repairs
A full repairing and insuring (FRI) lease describes a rental agreement in which the cost of all repairs and insurance are undertaken by the tenant. For this reason, when setting up a franchise in a commercial property, you should ensure that it is in an acceptable state before you sign the lease.
This will give you some leverage in getting the landlord to agree to repair the property before you sign, or reduce the rental cost for you to carry out the necessary amends yourself.
You might want to use the services of a surveyor to inspect the property before you sign the lease. Then, you can discuss any issues with the landlord and decide how they will be resolved.
Similarly, at the end of the lease, you’ll be expected to return the property to the state it was in when you signed the rental agreement. Any repairs or defects will be your responsibility and your landlord has the right to charge you if this is not done to an adequate standard.
- Proposed use of the property
A common restriction in FRI leases is how the premises can be used. Ensure you ask for a copy of the planning permission documentation to confirm that use of the property that you’re proposing is permitted.
Establish whether there are any limitations on the use of the property that may conflict with crucial activities associated with operating your business. This is where the services of an experienced commercial property solicitor are invaluable. Imagine investing in a franchise that you can’t operate fully due to an oversight in the commercial property lease.
- Deposit
As a tenant, you may be asked to enter a rent deposit deed. The rent deposit will usually be worth the equivalent of a couple of months’ rent and is to be paid upfront to the landlord. The landlord then has the right to draw funds from the rent deposit to reimburse any costs incurred, such as missed rental payments or damage that’s been caused. You would then be required to top up the rent deposit back to its original amount. In practice, the rent deposit would then be returned to you at the end of the lease.
- Stamp duty land tax (SDLT)
You don’t have to buy a commercial property to pay stamp duty land tax. SDLT is charged on property leases as well as purchases, where the value exceeds certain limits. This is another reason why you should stick to your budget when searching for property.
Leasing commercial property isn’t plain sailing
When searching for commercial real estate for lease, there’s more to consider than simply the cost of the rent. Hopefully, by reading this article you’ll feel better equipped to tackle the somewhat challenging process. If you follow these eight tips, there’s no reason why you shouldn’t have a straightforward and stress-free experience leasing commercial real estate. Just remember not to make any rash decisions that could come back to bite you in the future.
If you’re set on running a franchise but haven’t decided which one to go for yet, we have many other exciting businesses in our books looking for franchisees.
Becky Martin, writer