Franchisee Default Notification - help needed

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Franchisee Default Notification - help needed

Courtney Duong
Property Manager · TX · Member since 2019 · 327 posts · 69 votes

We manage a commercial property (retail, multi-tenant) and had a fitness tenant (a franchisee) who went dark late 2019 so we terminated the lease (they still owe us 3 months of rent).  Given that our property manager was a newbie he did not notify the Franchisor of this termination.  I just happen to look at the lease now and see that we were supposed to notify Franchisor of anything that happened.  

Here is what it says in the lease:

FRANCHISEE DEFAULT NOTIFICATION.  Landlord agrees to furnish XXXX, Inc. ("Franchisor") with copies and all letters and notices to Tenant pertaining to the Lease and the Premises at the same time that such letters and notices are sent to Tenant addressed to XXXX at YYYY Attention: Real Estate Compliance & Notification Department.  Landlord further agrees that, if it intends to terminate the Lease, the Landlord will give Franchisor the same advance written notice of such intent as provided to Tenant, specifying in such notice all defaults that are the cause of the proposed termination.  Franchisor shall have the right to cure, at its sole options, any such default within the time periods granted to Tenant under the Lease.  If nether Tenant or Franchisor cures all such defaults within said time periods (or such longer cure periods as maybe specifically permitted by the Lease), then the Landlord may terminate the Lease, re-enter the Premises and/or exercise all other rights as set forth in the Lease.  Prior to the expiration or termination of the Lease, Franchisor shall have the right to enter Premises to make any reasonable modifications or any reasonable alterations necessary to protect Franchisor interest in the Franchisor business and the Proprietary Marks and System (as such terms are defined in the Franchise Agreement), or to cure any default under the Franchise Agreement or any development agreement entered into by Franchisor and the Tenant or under the Lease, and Landlord and Tenant agree that Franchisor shall not be liable for trespass or any other crimes or tort. 

This unit is still vacant as of now and yesterday we had someone reached out to us expressing interest in leasing it.  Before getting into that I want to take care of the formality with this Franchisor the correct way so everything will be clean and clear.  Given that we already terminated the Lease with franchisee without giving any notices to Franchisor what are our options now?  Be honest and send notification to Franchisor saying we already terminated the Lease with franchisee already?  Or pretend nothing happened yet and tell them now that we intend to terminate the lease with franchisee?  Is this something simple enough that we can take care of ourselves by communicating correctly with Franchisor?  Or should we consult with an attorney?

Any input/advice is greatly appreciated.

Thanks.

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Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
6y
Originally posted by @Courtney Duong:

@Ronald Rohde have you dealt with something like this before?  Thanks.  

 Yes, I have. You have to reach out to them ASAP. If its a popular franchise, they can step into the shoes of the franchisor and revive everything and keep the space as current. You need to review all default notices and formulate a gameplan of what you WANT vs what the franchisor wants (once you know). Then you can decide next steps.

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  • Courtney Duong
    OP
    Property Manager · TX · Member since 2019 · 327 posts · 69 votes
    6y

    @Ronald Rohde have you dealt with something like this before?  Thanks.  

    0Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    6y
    Originally posted by @Courtney Duong:

    @Ronald Rohde have you dealt with something like this before?  Thanks.  

     Yes, I have. You have to reach out to them ASAP. If its a popular franchise, they can step into the shoes of the franchisor and revive everything and keep the space as current. You need to review all default notices and formulate a gameplan of what you WANT vs what the franchisor wants (once you know). Then you can decide next steps.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @Ronald Rohde:
    Originally posted by @Courtney Duong:

    @Ronald Rohde have you dealt with something like this before?  Thanks.  

     Yes, I have. You have to reach out to them ASAP. If its a popular franchise, they can step into the shoes of the franchisor and revive everything and keep the space as current. You need to review all default notices and formulate a gameplan of what you WANT vs what the franchisor wants (once you know). Then you can decide next steps.

    I just got notice that 24 hour fitness filed a BK... 

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  • Courtney Duong
    OP
    Property Manager · TX · Member since 2019 · 327 posts · 69 votes
    6y

    It is Fit Body Boot Camp.  The tenant (franchisee) already moved out at end of last year and the unit has been vacant.  We have a potential tenant who wants to moved in asap so we definitively want to end it with Fit Body Boot Camp.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    6y

    Make sure you are in COMPLIANCE with the leases to protect your rights.

    NOW may be a good time to review ALL your leases and have a full abstract of each to make sure you understand all the sections and obligations of the landlord/property owner.

    Gyms with Covid are getting hammered. I go running outside 15 miles at a time. We have a full gym in our subdivision but I haven't used it in many months. I used to go if it rained outside and could not run or weather too hot. Now I just do cross training in my house with music playing for an hour. In Gym if I do cardio machine for an hour some idiot who is sick with regular cold or even Covid could go on machine next to me and I am stuck with trying to finish work out or worrying they are infecting me with the virus.

    Gyms before Covid were pretty much worthless that were inline spaces. The franchisees have little to no net worth to speak of and minimal liquidity on average. The machines are rented or wear down real fast and electrical bill is off the charts to tenant. Most of the money is made off of vitamins, shakes, personal training, etc. The base membership is almost a money loser with gyms running constant specials to get people in the door and reoccurring revenue no matter how small it is to keep the lights on.

    Even post Covid a gym will be one of the last places for most people they will try to go back to. You have lots of people packed into a small space sweating, breathing heavily, and airborne particles going all over the place.

    Many trainers are going to online sessions now or doing workouts in groups outside where 6 ft distance can easily be achieved but you still workout as a group.

    If I am buying a retail center or client I do not count revenue for gym and consider it a dark space no matter what the income is showing. Just like a vitamin store, vape shop, etc. I see those tenants only as benefit if rent is say 10 bucks a foot and market is 20 and location is good. That way if they go out I can pay TI, LC, legal attorney fees and get another tenant in at higher rents and push NOI and value up. If the tenant is close to market (few bucks), market rent, or above then I see the tenant as a loser with hardly any upside. I don't want to replace one tenant for another in that situation UNLESS a bonus could be if I land a national tenant for that space at same rent per ft then theoretically the tenant mix of the center could change in a positive way and now the cap rate resale for the center compresses and value increases.

    One word can mess up everything and corporate tenants tend to have their own attorney in house or full time retainer so you should have the commercial attorney handle lease termination for you.

    No legal advice given.  

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  • Courtney Duong
    OP
    Property Manager · TX · Member since 2019 · 327 posts · 69 votes
    6y

    @Joel Owens thanks for the input.

    I hope I didn't confuse you, but the franchisee we kicked out at the end of last year was Fit Body Boot Camp.  And the potential tenant who wants to move in asap now is a martial art (and they are currently have another one at a different location which seems to be doing ok).  I remember you told me all about those gyms and martial art business a couple months back and we have been trying to avoid them.  Just that this space is 2350 sq ft and has been sitting vacant for almost a year now and it is hard to lease out a unit of this size for that location.  We have been getting calls/interests for the other 2 units but rarely for this one.  So we definitely want to split it up in 2 but not now due to the cost of doing so.  Plus, we think if we have a good tenant then maybe it's better to do the splitting at that time.  That way, tenant can build to fit their needs.  

    So, for this martial art guy, he offers to pay 2 months in advance. I said yes, no TI, 3 months free (still pays NNN for these 3 months), 2 months of rent in advance, 2 months deposit and he is ok with it. We also told him the base rent is at a deep discount due to Covid so we are only going to sign for a 1 year lease, after that if he wants to stay then it's a new lease and will be at market rate. That's when I started to read the old lease with Fit Body Boot Camp and found out that we were supposed to notify the Franchisor of our intent to terminate the lease with the franchisee and looks like our property manager (and the commercial attorney that he hired at that time to handle the termination of lease) did not send any notifications to the Franchisor!!! The martial art guy would like to start asap and we just want him to move in for now to bring more foot traffic to the center while waiting for this Covid thing is over. Once Covid is over, I think we can find a good tenant to replace him because this is a good location.

    Tomorrow I will reach out to Andy and/or Ronald asap to talk about the default of Fit Body Boot Camp the franchisee to the Franchisor.

    Last week we had an interest in a smaller unit.  It is a national bakery franchise.  But we had to turn them down due to our prohibited uses agreement with our current tenants.  The week before we did turn down that Thai massage parlor that we talked about in another post.

    Great input/insight/advice as always Joel.  I really appreciated it!  Thanks!

    0Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    6y
    Originally posted by @Courtney Duong:

    @Joel Owens thanks for the input.

    I hope I didn't confuse you, but the franchisee we kicked out at the end of last year was Fit Body Boot Camp.  And the potential tenant who wants to move in asap now is a martial art (and they are currently have another one at a different location which seems to be doing ok).  I remember you told me all about those gyms and martial art business a couple months back and we have been trying to avoid them.  Just that this space is 2350 sq ft and has been sitting vacant for almost a year now and it is hard to lease out a unit of this size for that location.  We have been getting calls/interests for the other 2 units but rarely for this one.  So we definitely want to split it up in 2 but not now due to the cost of doing so.  Plus, we think if we have a good tenant then maybe it's better to do the splitting at that time.  That way, tenant can build to fit their needs.  

    So, for this martial art guy, he offers to pay 2 months in advance. I said yes, no TI, 3 months free (still pays NNN for these 3 months), 2 months of rent in advance, 2 months deposit and he is ok with it. We also told him the base rent is at a deep discount due to Covid so we are only going to sign for a 1 year lease, after that if he wants to stay then it's a new lease and will be at market rate. That's when I started to read the old lease with Fit Body Boot Camp and found out that we were supposed to notify the Franchisor of our intent to terminate the lease with the franchisee and looks like our property manager (and the commercial attorney that he hired at that time to handle the termination of lease) did not send any notifications to the Franchisor!!! The martial art guy would like to start asap and we just want him to move in for now to bring more foot traffic to the center while waiting for this Covid thing is over. Once Covid is over, I think we can find a good tenant to replace him because this is a good location.

    Tomorrow I will reach out to Andy and/or Ronald asap to talk about the default of Fit Body Boot Camp the franchisee to the Franchisor.

    Last week we had an interest in a smaller unit.  It is a national bakery franchise.  But we had to turn them down due to our prohibited uses agreement with our current tenants.  The week before we did turn down that Thai massage parlor that we talked about in another post.

    Great input/insight/advice as always Joel.  I really appreciated it!  Thanks!

     Did your PM hire that attorney? Or did you pay? Best case, you notify them and they waive they rights. Worst case, they may shake you down for some money claiming that they would have taken over, they could have applied to assign, its a profitable location, yadda, yadda. You pay them some go away money and re-let the space.

    0Reply
  • Courtney Duong
    OP
    Property Manager · TX · Member since 2019 · 327 posts · 69 votes
    6y

    @Ronald Rohde I just PM-ed you.  Please take a look.  Thanks.

    1Reply
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