Commercial Leases for Franchisees

Here at the Law Offices of Steven J. Eichberg, we specialize in reviewing, revising, and negotiating commercial leases for franchisees. Over the years, we have worked on nearly 2,500 franchise leases for many different franchises all over the country and particularly for clients in Los Angeles and California. With all of this experience, we have a deep well of knowledge to draw on when working on commercial leases. We pride ourselves on our ability to handle commercial leases faster and more meticulously than any other law office. We are routinely able to revise a lease and get back to our client within 48 hours of initially receiving it, while most attorneys will take weeks to go through the same process. And we aren’t only fast – we also offer the most thorough review and revisions of commercial leases of any law firm.

What is the cost?

We charge a flat rate for commercial lease reviews and negotiations at a significantly reduced cost from my regular hourly rate, and at a much lower rate than most attorneys who have little or no expertise in this field. Our extensive experience in commercial leases gives us the ability to quickly and expertly review leases and get the best outcomes for our clients. The fee is due upon delivery of the revised lease to the landlord.

What is the process?

Once we receive a copy of your lease and letter of intent (LOI), we will begin to go through it. At the same time, you should read through the lease and work to understand everything that it says – we need to know about any questions or concerns you have. We will prepare and send you a copy of a letter with the revised lease or embed our revisions directly into the lease. Once you approve it, we will send it to the landlord and commence negotiations, and you will not be asked to sign a final lease document until you are completely happy.

THERE ARE MANY TYPES OF COMMERCIAL REAL ESTATE LEASES ALTHOUGH THEY ARE GENERALLY REFERRED TO AS ONLY THREE. THIS HELPS A FRANCHISEE OR ANY TENANT TO GAIN AN UNDERSTANDING OF JUST WHAT THESE TYPES OF LEASES ARE.

There are three basic types of commercial real estate leases. These leases are differentiated based on two rent calculation methods: "net" and "gross." The gross lease typically means a tenant pays one lump sum for rent, from which the landlord pays its expenses. The net lease has a lesser base rent, but other expenses paid for by the tenant. A modified gross lease is a hybrid between the two. While terms vary from center to center, city to city and state to state, this basic overview will help you shop for the best deal possible.

GROSS LEASE OR FULL SERVICE LEASE

In a gross lease, the rent is all-inclusive. The landlord pays all or most expenses associated with the property, including taxes, insurance, and maintenance from the rent received from its tenants. Utilities and janitorial services are included within one easy, user-friendly rent payment.

When negotiating a gross lease, you should ask which janitorial services are provided, and how often they are offered. Excess utility consumption beyond building standards is sometimes charged back to tenant; so if the tenant is a big consumer of electricity or water, this point should be clarified in the lease as well. It is logical that a high water or electric user would want to pay its share based on the size of its space (premises) in relation to the entire property; conversely a low utility user would want its utility payments to be based on its actual use. Many times a landlord will either install or have you install separate meters, but there are times the landlord reserves the rights to estimate your use of utilities. The tenant pays its property insurance and taxes which also varies greatly from state to state as well as locally.

A major benefit of a Gross lease is that it is easy for the tenant to understand, which can help you to forecast expenses without worrying about an unexpected roof collapse and replacement charge, for example. The landlord assumes all responsibility for the building, while you concentrate your efforts on growing your business.

NET LEASE

In a net lease the landlord charges a lower base rent for the premises plus some or all “costs” which are expenses associated with operations maintenance and use that the landlord pays. These can include real estate taxes, property insurance, and common area maintenance charges (CAMS) which include janitorial services, property management fees (an add on fee for the landlord which can be based on either a percentage of the total amount of the CAMS or on the total amount of the rent in the premises or center, sewer, water, trash collection landscaping parking lots fire sprinklers and any commonly shared area or service.

There are several types of net leases:

SINGLE NET LEASE (N LEASE)

In this lease, you pay base rent plus a pro-rata share of the building's property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant); the landlord covers all other building expenses. You also pay utilities and janitorial services.

DOUBLE NET LEASE (NN LEASE)

You are responsible for base rent plus a pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. You are once again responsible for your own janitorial and utility expenses.

TRIPLE NET LEASE (NNN LEASE)

Of all the leases a landlord can offer you, the most popular type of net lease for commercial freestanding buildings and retail space is commonly referred to as triple net. It is known as a NNN lease, where you pay all or part of the three "nets"--property taxes, insurance, and CAMS--on top of a base monthly rent. Common area utilities and operating expenses are usually charged as well; for example, the cost for staffing a parking attendant would be part of the NNN fees. Of course, you also pay the costs of your own occupancy, including janitorial services, utilities, insurance and taxes.

Landlords pass on to their tenants a portion of these expenses based on their proportionate, or pro-rata share. A tenant who leases 1,000 square feet of a 10,000 square foot building would be expected to pay 10% of the building's taxes, insurance, and CAMS, for example.

Triple net leases tend to be more landlord-friendly, and tenants should carefully review NNN fees and negotiate caps on the amounts they can be raised annually. A NNN lease can also fluctuate from month to month and year to year as operating expenses increase or decrease, making the company's expense forecasting tricky and sometimes frustrating. NNN leases also usually give the landlord the right to estimate its expenses for the next year, but charge it to you in the current year. Sometime after the Calendar year ends the landlord will reconcile the amount you paid in NNN and either you can be charged back for any expenses not paid or credited with any expenses overpaid.

Although it seems a stretch there are benefits in the NNN leases. You can see business operating expenses in relation to what you are charged. Cost savings in operating expenses are passed on to you rather than to the landlord. In addition, the monthly rent in a NNN lease is potentially lower than in a gross lease, as you have a higher level of responsibility for the building via the expenses for which you pay.

ABSOLUTE TRIPLE NET LEASE

In my entire practice and almost eighteen hundred leases I have never had to negotiate this kind of lease. I have read some and it is a less common option that is more rigid and binding than the NNN lease. In this type of lease tenants carry every imaginable real estate risk, for example, being responsible for construction expenses to rebuild after a catastrophe, assuming the landlord’s insurance is insufficient or for continuing to pay rent even after the building has been condemned. Tenants have ultimate responsibility for the building no matter what. If you see this type of lease you should immediately run in another direction.

MODIFIED GROSS LEASE

As the gross lease is more tenant-friendly, and the net lease tends to be more landlord-friendly, there is a compromise lease for both parties. The modified gross lease (sometimes called the modified net lease) is similar to a gross lease in that the rent is paid in one lump sum, which can include any or all of the "nets"--property taxes, insurance, and CAMS. Utilities and janitorial services are typically excluded from the rent, and covered by the tenant. Tenants and landlords negotiate which "nets" are included in the base rental rate. The modified gross lease is more popular with tenants, because its flexibility translates into an easier agreement between tenant and landlord. Unlike the NNN lease, if insurance, taxes or CAM charges increase, the lease rate would not change. Of course, if those expenses decrease, the cost savings is passed on to the landlord. As janitorial service and electricity are not covered, tenants can better control how much they spend compared to a gross lease.

SUMMARY OF NNN LEASE, MODIFIED GROSS, OR FULL SERVICE COMMERCIAL LEASES

When evaluating options for office space lease, it is important to compare the different lease options with an eye toward all expenses, and not just the base rental rates. NNN base rental rates tend to be much lower, with additional expenses added for the real monthly rate.

Market forces will tend to even out rental rates for comparable properties, regardless of type of lease. Tenants should expect to pay roughly the same amount with a NNN, modified gross or full service lease for similar quality office spaces in the same area.

The most important rule of commercial leases is that you find an attorney who is an expert on your behalf who can negotiate significantly harmful language from your proposed lease, add new language that gives you more protection and save you on NNN charges for the entire term of the lease. It is also important for you to read your lease carefully, and clarify exactly what expenses for which you have responsibility. Circumstances under which additional charges will occur should be identified and caps negotiated.