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Renegotiating Leases

dimeIn the forum, a visitor proposed a question whether a buyer of an existing franchise can renegotiate the lease.  Paul Steinberg as always provides great guidance:

As previously noted, most landlords will not agree to a novation but most leases contain provisions relating to assumption.

Viz the personal guaranty, I have had leases which provide that upon assumption, the incoming tenant signs a personal guaranty whereupon the outgoing personal guarantor is released. Of course, this works only if the outgoing (selling) entity will be a shell after the sale, but if that is not the case then you can tweak the language to achieve the desired result.

If you are the seller and are unable to get a release from the guaranty, you should make sure to have appropriate language in your contract (or addenda thereto) to enable you to go after the purchaser and the natural person/guarantor which stands behind the purchaser. This will avoid the purchaser defaulting and leaving the original guarantor stuck. Of course, this will only work if the defaulter’s guarantor has assets…but judgments are good for many years (depends on state law). At very least, the new (purchaser) tenant will think twice about defaulting.

Inc. magazine tackled this question.

….If the landlord is reasonable,

Go to the landlord and say, ‘We really want to stay here, but we just can’t make it at the rent we’re paying. Here’s what we can afford as a base rent right now.’ And explain how you came up with the figure. Take him through the numbers, and show him why you’ll be able to survive with the lower base rent but you’ll go out of business if the rent remains at the current level. “At the same time, I would make it very clear that you have no problem paying more as your sales come back. One way to do that is by offering to give the landlord a percentage of your gross sales over a base amount that you agree upon.

….If the landlord is NOT reasonable,

Basically, you need to do a hardball negotiation. I’d go to him and say, ‘We can’t make it at the rent you’re charging us, and we’re going to be forced to close the store unless you give us some help.’ Then see what he says. It’s important to understand that you have a fair amount of leverage in this situation. Even if the landlord weren’t facing tenant problems already, it costs him money whenever somebody leaves, in terms of lost rent, broker’s fees to find another tenant, probably some demolition, and so on. My advice would be to hold out for a rent abatement of some sort. I think you have a good chance of getting one. For example, you can probably get the landlord to let you have a rent vacation, which would be preferable to rewriting — and extending — the lease. If you have problems with the landlord, you don’t want to lock yourself into a lease agreement for a period that’s any longer than necessary. You’re better off keeping your options open.

What metrics should you use to determine whether your rent is too high? Some experts recommend targeting any store with negative cash flow, or with occupancy costs higher than 10 percent of sales.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.

One comment

  1. If you are paying close to the market lease rate, they the landlord is likely to help you out. If you are paying well below current market value, then the landlord will likely play hardball hoping you’ll leave.

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