Readers will likely have seen the recently published piece from Senior Associate and Franchising lawyer, Catherine Sedgley: Due Diligence: The best investment you can make prior to buying a franchise.
As this blog has been written in accompaniment to Catherine’s article, I would suggest spending a few minutes going through the suggestions that she has made (if you haven’t already) – as this information remains relevant for all franchisees.
As a Commercial Property lawyer, I spend almost 100% of my time advising clients on leases. As such, I would like to reiterate that when you are buying a franchise business, regardless of whether you are a franchisee purchasing a franchise from a franchisor, or you are a franchisor buying a business back, it is crucial to review the lease that has been put in place in order to ensure that you are aware of the tenant obligations that you are also acquiring.
One of the key tenant obligations that stands out to me the most, in terms of client confusion, is the make good clause. Whilst some tenants who have taken over a lease part-way through its term may be under the impression that their ‘make good‘ obligations officially commence from the date that they have personally taken over the lease – the reality is that when a business is acquired, the purchaser automatically inherits all of the prior tenant’s existing obligations.
Two questions that I suggest any business owner inheriting a lease as part of the purchase of a business ask are:
- What does the make good clause say? The lease will usually say that the premises needs to be returned to the landlord as it was (i.e. as the condition report described the premises to be), either on or before commencement date.
- Does the lease state that you need to leave the premises in a bare shell? This is the case in most retail leases – if your lease does state this, then it is crucial that you have a full understanding of what it means, and how you will account for it in your budget.
A few more points worth considering for those responsible for taking over a lease:
- Have there been any incentives provided by the landlord? If so, can these incentives be passed on to your assignee?
- Will you need to provide replacement security when your rent is reviewed – and/or are there other conditions that you will similarly be required to comply with?
- Will the landlord require directors guarantees?
- If yours is a retail lease, have you been provided with a current disclosure statement or an assignee statement? It is important to note that these vary depending on the state.
- Relocation and demolition clauses – are there any imminent plans?
Coleman Greig’s Franchising team works with our clients to ensure that both general due diligence and review of occupancy documentation is carried out effectively across all matters. If you are looking to acquire a franchise business and you would like to speak with an experienced Franchising lawyer with regard to your purchase, please don’t hesitate to get in touch today: