Texas Real Estate Blog

Leasing To A Franchise?

May 2, 2011

Clearly, franchises (especially nationally recognized ones) can be a huge asset to any development due to their ability to generate traffic, visibility and, hopefully, juicy percentage rents. However, if you have ever had the opportunity to work on a lease or development agreement with a franchisee or franchisor of a national powerhouse, you quickly realize that there are numerous issues (other than leverage) which are unique to this type of business and, if addressed correctly, will prove to be a benefit to both the landlord and tenant over the long haul. I think the most complex issue I ever addressed  was the unfortunate demise of the franchisee. This gets really ugly especially when the franchise is a good one with a stellar reputation but failed primarily due to the incompetency of the franchisee. The last thing the franchisor wants is a very visible and public closing which could be a publicity nightmare. I represented the developer in that case and fortunately I was lucky enough to have astute parties involved so, while it took some time to get a new franchisee on board, both the developer and the franchisor absorbed some of the costs to resolve the matter. They both took a long-term approach to the viability of the project and it worked out well. This is not always the case, so both parties need to address, at the outset, as many contingencies as possible to assure a favorable outcome. This articleSP-#3389981-v1-Leasing_to_Franchisees discusses several issues of importance to franchisees, franchisors and landlords. Surprisingly, it’s a short list, but an important one.

Speaking of franchisees—Normally a franchisee is an entrepreneur recently AWOL from the corporate rat race to seek his/her fortune in the “easy money” of the franchise world.  However, those of us who swim with this energetic and creative crowd, know all too well of the many pitfalls which often trap the unwary small business owner. As such, I share this great piece which I found this morning while scanning the news wires for all of the fantastic dirt on slime ball Bin Laden’s demise http://www.businessinsider.com/five-legal-traps-every-entrepreneur-should-avoid-2011-5?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+businessinsider+%28Business+Insider%29&utm_content=Google+Reader This is just a few of the many, many issues that must be resolved by a founder of a business, but I love the practical, common sense approach.



February 14, 2011
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A “Subordination, Non-Disturbance and Attornment Agreement” is an agreement that is executed between a lender, landlord and tenant as part of a lease transaction whereby, essentially, the tenant is protected from the termination of it’s lease upon a foreclosure of the lender’s lien (landlord’s loan). I address the SNDA in detail in my article found at SP-#3328973-v1-Visiting_and_Re-Visiting_Subordination__Non-Disturbance_and_Attornment_Agreements It’s an extremely important document because if the lease is subordinate (later in time) to the lender’s lien, a foreclosure will, in most states, extinguish the lease. While it’s always been an important document, it has received much more attention in our struggling real estate market due to the tenuous financial condition of many landlord’s. In fact, most leases simply require that the landlord deliver this agreement to the tenant at some point after execution of the lease. The problem with scenario is that this obligation is often an easily forgotten post closing item which does not raise its ugly head until there is a foreclosure of the tenant’s premises. In fact, I just finalized a lease transaction where we heavily  negotiated the SNDA because we were dealing with a Special Servicer.  Ergo– the landlord’s loan was in the process of re-structure and the potential for foreclosure in the near future was a real possibility. Best case is to get the SNDA executed and delivered by all three parties concurrently with the execution of the lease. That way everybody can go forward with warm and fuzzy feelings!

Speaking of warm and fuzzy feelings, today is a very special day in the hearts and wallets of every couple in love and CEO’s of greeting card companies and confectionery vendors (sorry for the image above–I could not resist!) The importance of this day, aka, “Saint Valentines Day” was hammered into my head over 20 years ago when, on the eve of a closing for one of my largest clients, I was forced to contact my bride and attempt to move our romantic dinner date to another night. She immediately informed me that I was to tell this “bell weather” client to go to “H-E double toothpicks”, because today was Valentine’s Day! Needless to say, I got the message.  Actually, V-Day was originally a religious holiday established by the Pope in 496 AD in honor of one or more Christian martyrs (Saint Valentine being the most notable). It was eventually deleted from the Roman calendar in 1969 by Pope Paul VI (unmarried of course) but remains a popular (to some) day on which lovers express their love for each other by presenting flowers, offering confectionery and sending greeting cards. Frankly, I celebrate V-day every day—just ask my wife!

Leases,Workletters and Tuesday Morning Quarterbacking

February 8, 2011
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Well, it’s Tuesday morning after Super Bowl Sunday and the news is filled with wonderful highlights from the big game.  However, who would have guessed that real estate issues would dominate the discussions. Yes, as fans and Cowboy haters all over the country blame and threaten Jerry for the ticket disaster, little does everyone know that the devil (no-not Jerry) is in the details (contracts and legal status) as opposed to the obvious fact that the stadium is owned by Jerry’s partnership. When you boil this down, I believe we will be focused on two sections of a lease which are commonly overlooked– the “alterations” paragraph and the “workletter” addendum.  It is my understanding from talking to lawyers close to the Cowboys that the parties in the Superbowl set up this way: Landlord: Cowboys (Jerry’s ownership partnership), Tenant: NFL,  and Licensees of Tenant: Fans. Based on what I can surmise from the serious crawfishing by the NFL, I am assuming that the NFL had control over the construction of those stands and simply realized way too late that, due to the enormity of the job and some unexpected weather problems, the record attendance was not going to happen. This high-profile screw up is going to put a magnifying glass on the interplay (or lack thereof) of the basic construction and alteration paragraphs of a lease. Normally, the Landlord will have complete discretion and consent over all alterations or construction done to its premises. However, even though it may have such consent, it may, nevertheless give to the Tenant control over the actual construction subject to the protection  and indemnification of the Landlord. The infamous “workletter” which is buried as an addendum to the Lease is of major importance here because it addresses the scope, authority and liability of the various parties (including the contractor) in connection with  the construction. I have always maintained that the most complex area of real estate law is in the construction area as, in this area, we have to delve into, and understand, other disciplines (engineers and architects) that are integral to the process. I am guessing from the way this is shaking out is that the NFL got Jerry’s consent (leave them there for next year!)to build the stands with the proper consent and indemnification back to Jerry. That’s just one simplistic reason the, the NFL, is taking the lead on resolving the issue.

Now, what about the poor fans?As you can tell they are not happy http://newsfeed.time.com/2011/02/08/super-bowl-ticket-scandal-are-fans-planning-a-suit/?hpt=T1 and the NFL seems to be cratering like a cheap Super Bowl tent http://www.cnn.com/2011/SPORT/football/02/08/super.bowl.seating/index.html?hpt=T1# My opinion here is that the NFL  (a) is trying to do the right thing for the fans and (b)is bracing itself for a huge image problem with the lockout on the horizon. Because, I believe the NFL has little exposure and, potentially, several defenses (force majeur??!)to the claims of these fans.  The next time you attend a sporting event, read the back of your ticket and see what legal status you hold under that agreement. Generally by purchase of the ticket, you are purchasing a revocable license to enter upon the premises of the owner of the property. Sounds kind of screwy doesn’t it? All along we thought we were buying the ticket to support our team when, in reality and legally, we are buying a ticket for the privilege of watching their team. Ugh–the truth hurts. As a “licensee” (quote-Black’s Law Dictionary)-we have the privilege to enter upon land arising from the permission or consent, express or implied, of the possessor of the land but we go on the land for our own purpose rather than any purpose or interest of the possessor”. Make sense? Yeah, I didn’t think so. The only duty the possessor (Jerry and the NFL) owe us is the duty of reasonable or due care. Ergo, the reason the NFL pulled the plug (with the help of the City of Arlington) on the stands is that their liability for an injury to someone (because they knew of the dangerous condition of the stands from the fire marshal and the contractor) was much higher than denying access. Of course, everything I have just expressed is purely my opinion based on a ton of assumed facts and without seeing any of the documentation on this event; however,  if I am a fan who got hosed on this deal I take my triple refund and tickets to next year’s bowl and run!!

Nevertheless, a big thanks to all Steelers and Packer Fans for making this a great event. I have been to several Cowboy/Steelers/Packer games (Remember SB XXX!) and can attest to the class and quality of the Green Bay and Steelers faithful. (sorry about the weather-we were just trying to make you feel at home). Also, much thanks to the Bowl Committee for their tireless work and the citizens of the Metroplex for their Texas hospitality. It was a great time and super experience.

Final thought—-see this situation where Jerry might have some exposure  http://superbowlblog.dallasnews.com/archives/2011/02/jerry-jones-facing-lawsuit-fro.html Yeah right-get in line!

    Steve Watten

    Real Estate News& Views

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