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7th Circuit Court of Appeals Judge Richard Posner has written an essay in the New Republic "discussing" Justice Scalia's recent book (co-authored with Bryan Garner), "Reading Law: The Interpretation of Legal Texts."

In Judge Posner's essay, he reminded us of an "old saw," an unreported 2006 Massachusetts court decision** about the meaning of the words we choose to use in our leases.*** In this particular case, the word is "sandwich."

A Panera Bread franchisee spent several months negotiating a lease, "partly because of [Panera's] request to include an exclusivity clause in the lease."

Panera prepared the original text and it was revised three times before the lease was signed. Subject to a number of carve-outs, the core of its disputed language was:

Landlord agrees not to lease... for [use as] a bakery or restaurant reasonably expected to have annual sales of sandwiches [emphasis ours] greater than ten percent of its total sales... ."

Pretty simple - protect our sandwich business, we don't want the competition.

Along comes the Mexican-style QSR (quick service restaurant f/n/a fast food restaurant) - Qdoba. Its menu items include tacos, burritos, and quesadillas.

So, after Qdoba spent "over $85,000" in planning costs and contractually committed to spending another $300,000, Panera threatened its shopping center landlord and the landlord reacted by seeking a declaratory judgment to the effect that Panera's exclusive use right had not been violated.

Panera responded by asking the same court for a preliminary injunction to stop Qdoba. The niceties of those remedies, declaratory judgment and preliminary injunction.

And Panera lost. Here's why:

Simply speaking, Panera argued that a burrito was a sandwich and the Landlord argued that it was not.

So, the court had to interpret the lease. There are a series of rules used by courts to aid in contract interpretation.

For now, all we need to know is that "[t]he starting point must be the actual words chosen by the parties to express their agreement. [] If the words of the contract are plain and free from ambiguity, they must be construed in accordance with their ordinary and usual sense."

From that point onward, it was all downhill for the court. It found that the term "sandwiches" was not ambiguous. Thus, because the lease didn't provide its own definition, it looked for the "ordinary meaning."

Where did that come from? The court turned to The New Webster Third International Dictionary, where it found a "sandwich" to be "two thin pieces of bread, usually buttered, with a thin layer (as of meat, cheese, or a savory mixture) spread between them."

Without saying so, the court couldn't find the "second" slice in a taco, burrito or quesadilla, and it didn't even believe that the flour tortilla was bread.

Panera tried to extend a finding by the International Trade Court's to "prove" that a corn taco shell was bread, but this court was unmoved. It said the Trade Court's tariff-setting opinion used "bread" in its commercial sense, but the Panera lease was using "bread" (as an unspoken part of "sandwich") in its ordinary sense, and tacos are not ordinarily thought of as "bread."

According to the court, there was no evidence that, during their negotiations, either the landlord or the tenant intended burritos, tacos or quesadillas to be counted as sandwiches. Thus, Panera lost.

The Massachusetts court pointed out certain missed opportunities for Panera to have done a better job for itself. For one, during negotiations, it never even told the landlord that it had any concern about burritos, etc. Next, it knew or should have known of other QSRs that sold sandwich "alternatives," either by way of its general knowledge or because there were Mexican-style restaurants at other shopping centers near this very location.

Fundamentally, the court summed up this blog for us when it wrote: "Because [Panera] failed to use more specific language or definitions for "'sandwiches' in the Lease, it is bound to the language and the common meaning attributable to 'sandwiches' that the parties agreed upon when the Lease was drafted."

What went wrong for this Panera franchisee was that it forgot what it really wanted to protect. It defined its business too narrowly. The Panera franchisee shouldn't have thought of itself as being a sandwich business.

Assuming that it wasn't going to be able to bar every other style of QSR, it probably should have seen itself as selling items that were the functional equivalent of sandwiches.

Courts are people too, and as people they understand categories described by way of example. So, Panera could have "gone for" a list, such as: "sandwiches and the functional equivalent of sandwiches, including without limitation: wraps, burritos, tacos, quesadilla, and pita pockets."

Add "hamburgers" or "hot dogs" if that's what you intend. That might have done the trick.
Also, it would have fleshed out the "issue" during negotiations, and had the text survived, this case would not have arisen in the first place - no angst, no legal bills.

Now, to beat up on the court a little (as Judge Posner seemed to be doing). The court's strict reliance on the dictionary ended any other attempt it might have made to understand what was really intended and, quite frankly, what should have been expected - at least to the point where the issue could (or should) have been fleshed out during lease negotiations. That's unfortunate because, had the court been inclined (or persuaded by Panera's attorneys) to think beyond "textualism," it might have realized that it was authorizing the sale of items like pita pockets (under the one piece of bread theory).

From there, one could go to an intact roll with a slit on the side and stuffed with meat. How about an "open" roast beef "sandwich"?

How about two of them on sale for five dollars? Eat them one at a time (meaning neither is the court's "sandwich") or fold them together yourself - sandwich or not? On the other hand, how would have the court defined an "open roast beef (or other open) sandwich" if it had already concluded that a sandwich needs two slices of "bread"?

Does the ordinary consumer "see" a hamburger as a sandwich? The court did. Did the landlord? Honestly, did the tenant?
So, if any reader wants to take a shot at redrafting for Panera, keep in mind that using the "list" approach of specifically saying "tacos, burritos, and quesadillas," and not using those as examples, might not catch wraps, pita pockets or similar foods of which neither the reader nor this writer are aware.

We won't discuss whether a restaurant serving "Middle Eastern" food is protected by a carve-out for "near-Eastern" food. Nor did this court, even though the question apparently was presented.

Wikipedia says it like this: "Before the First World War, "Near East" was used in English to refer to the Balkans and the Ottoman Empire, while "Middle East" referred to Iran, Afghanistan, and Central Asia, and the Caucasus. In contrast, "Far East" referred to the countries of East Asia (e.g. China, Japan, Formosa, Korea, Hong Kong, etc.)." It also says the following: "Many [who?] have criticized the term Middle East because of its implicit Eurocentrism."

Ruminations takes no position on this because, if it did, it would feel compelled to figure out what a "Mexican-style restaurant" might be.

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Let's say you own a regional system of franchised stores. Your newest franchisee has just handed you a draft lease for the store he intends to operate.

What are the six most important changes you can negotiate to protect your interest in the new location - and the associated goodwill - in case the franchisee defaults under the lease, the franchise agreement, or both? In order of importance, here are six critical goals to shoot for:

1. Notice of default. Insist the landlord agree to give you written notice of any lease default by the tenant, even if the lease does not require that the tenant be notified. Keep in mind the lease may make certain events (e.g., nonpayment of rent or failure to maintain required insurance) automatic defaults without needing to notify the tenant. If the lease does require notice as a precondition to default, insist the landlord agree to copy you on the notice sent to the tenant. It is essential that you learn about your franchisee's failure to pay rent (or otherwise perform under the lease) in enough time to decide upon - and implement - an effective response.

Without this most basic of protections, the eviction process could be well under way or even complete before you learn of the tenant's failure to perform. Although some landlords resist the administrative burden, a prudent one will recognize that bringing you into the process early on will enhance prospects of a quick resolution without substantial legal costs or prolonged interruption of the rental stream.

2. Right to cure. Having the right (but not the obligation) to cure any lease default by the tenant goes hand-in-hand with the right to receive notice of that default. Ideally, the period permitted for your cure will exceed that allowed for the tenant's cure; among other things, the lease may permit the tenant only a short period, or none at all, to cure matters such as a monetary default, failure to insure or a prohibited assignment.

You can expect the landlord to try to limit the number of times you will be permitted to cure during the lease term; you can also expect the landlord to try to keep the cure period to 30 days or less.

3. Consent to lease amendments. If the landlord and tenant are permitted to amend the lease without your consent, any protections you succeed in building into the lease can disappear with a stroke of a pen.

Moreover, the way will be cleared for the tenant to leave your franchise system (or join a competing system) and retain control of the store by negotiating necessary lease changes (such as a modified use clause or rent structure) directly with the landlord. Having the right to approve any amendments to the lease (or, at a minimum, those that affect your rights and interests as franchisor) before they become effective is critical to your ability to protect your interests and preserve locational control.

For similar reasons, you should seek to prohibit the tenant from having the right to renew or extend the lease term, assign the lease or sublease the premises without your consent; all are mechanisms for the tenant to attempt to exit your system, join a competing system or bring in a competitor to operate in the store location.

4.Limit permitted uses. The uses permitted under the lease should be limited to operation of the franchised store under the parameters of the franchise agreement.

Not only will this impede the tenant from assigning the lease to a competing operator (or anyone else who does not intend to operate the franchised store), it will also help ensure the lease can be transferred only to you or another franchisee in the event of the tenant's bankruptcy.

5.Conditional assignment of the lease. Consider requiring the tenant to conditionally assign the lease to you. Such an assignment would give you the option (but not the obligation) of taking over the lease and operating the store (or possibly transferring the lease and store to a another franchisee) in the event of the tenant's default under the lease and/or the franchise agreement.

Conditional assignment language can be inserted in the lease itself or in a separate document. However the assignment is documented, the landlord's consent (given up front, upon execution of the lease) is essential. You can expect the landlord to seek your agreement to completely cure any existing default by the tenant if you choose to exercise your assignment rights.

6.Cross-default with franchise agreement. Including a clause that makes a default under the franchise agreement an automatic default under the lease will give the tenant/franchisee another incentive to perform, and it will increase your leverage in the event of nonperformance. However, the landlord may be concerned about the risk of lease termination because of a technical default under the franchise agreement.

Be prepared to identify which of the tenant/ franchisee's obligations under that agreement are important enough to justify termination of the lease in the event of a violation.

Even Better Protection

Your financial standing and track record, the size and prominence of your franchise system, and the importance of the lease to the landlord will all impact your success in securing these changes. Ideally, negotiated concessions are set forth in a rider or addendum to the lease, which you would sign as a party along with the landlord and tenant.

Alternatively, language can be added to the lease naming you as a third party beneficiary of the negotiated concessions. This is a less desirable approach, however, because your rights to enforce the lease as a third party beneficiary may not be clear. In any event, obtaining these six changes - or most of them - will afford you much greater protection than the typical landlord form lease.

This has been a guest post by Steven J. Davis, counsel to Thompson Hine LLP. Steve is counsel in the firm's Real Estate practice group. He focuses his practice on the acquisition, sale, development and leasing of commercial real estate and commercial construction contracts.

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Now as scary as providing a personal guarantee may be there is not all bad news in both how you approach the subject with your prospective landlord and how you can negotiate a better guarantee for yourself.

Lastly you also need to understand the "law" in your local jurisdiction, which could mean State, County,City laws.

This is why it is essential for you to have legal representation in any real estate transaction.

In many jurisdictions landlords are required to "mitigate" their losses. What this means is before they can cash in what you put up to guarantee the lease the landlord has to do a few things first.

Firstly they can use your security deposit right away. No questions asked.

Secondly, they must make every effort to re‐lease the premises in a timely manner. This means they can't sit around waiting for the next tenant to arrive on their doorstep. They must actively market the space. Once a replacement tenant has been found and secured and only then will your loss or the amount you will be paying as a result of your guarantee be calculated.

The landlord will calculate the number of months of not receiving rent. They will add to this the marketing costs, legal fees, renovation costs and commissions associated with the loss mitigation.

They will in most cases be entitled to interest on the outstanding amount owed for mitigation period. So unless you are near the end of your lease the amount of actual exposure can be significantly reduced.

However, if market conditions are unfavorable or the economy is not good this can work against you as it may take a landlord longer to find a replacement.

The following are some pointers of reducing your personal exposure under the personal guarantee.

1. You can try and limit the amount of time you will guarantee the lease term. Perhaps you can have language that says "that after 2 years in the space, provided the tenant has not been in any default and has been in good standing with the landlord" the personal guarantee goes away or reduced by certain amount of time".

2. You can also try to tie the time limit to your business doing a certain amount of gross sales which you can substantiate to the landlord and if you achieve that level of sales for a certain amount of continuous time the guarantee goes away or is drastically reduced.

3. You can try a have a "liquidated damages" clause which means you are willing to lose a preset and mutually agreed upon amount of money to settle any default. Be cautious as this may mean a substantial amount compared to going the mitigation route.

4. You should require language that absolutely requires the landlord to mitigate its loss, just in case there are no hard and fast laws in your jurisdiction.

5. You can try and have a co‐signor or co-guarantor who has better financials, but be careful as its usually a relative and you all
know how that can play out if your business falters.

6. Try can have a shorter term lease, is reduces the total amount. For example if you were thinking of a 5 year lease term, think about a 3 year term with an option to renew for 2 years.

Your exposure would be only 3 years. Please note however, the shorter term lease may cost more because the landlord wants the security of knowing they won't have to re‐lease the space sooner. Also be aware, if in the event you are having interior improvements done by the landlord and the cost is being rolled into the lease payments, this can cost you more for
a shorter term since the payments will be based on the length of the initial term.

Lastly,if you get a business loan for whatever reason the lender will require you to have a lease term that is the same or greater than the loan term.

Other than these tips you should be prepared to have to sign a personal guarantee.

The only exception might be if you are going to lease property in a run down, economically stressed area, then a landlord should be happy to see you and your business and not require a personal guarantee.

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You decided to become a newly minted franchisor.

And when that day finally arrived how exciting was that?

You were going to conquer the world with your franchise brand.

Here's what you did right.

Started with a tested business model with a verifiable proof of concept.

Hired a competent and experienced franchise attorney to develop your franchise agreement and franchise disclosure document - FDD.

Your franchise attorney strongly suggested (or insisted) since you have a strong proof of concept for your franchise model that you include an Item 19 Financial Performance Representation - FPR and you did it.

Developed an operations manual, training system and support system that is scalable as you grow your franchise system.

You had a reasonable budget to market for franchise recruitment.

But, after a while, you will hate being a franchisor. Here are your 7 biggest beefs.

1. Early franchisees you selected seemed very passionate about being franchise owner/operators but they are not living up to what they promised and you're more than disappointed.
2. Multi-unit franchisees are not current with their development objectives and they expect you to not hold them to what everyone agreed to. They want some or all of the following extensions, refunds or credits against franchise fees and in return you get nothing. Not even what you originally bargained for.
3. You have a great training program and franchisees are shortcutting what your program offers and requires.
4. Franchisee local market success depends on local store marketing, your franchisees don't make the investment in it. And they complain to you that sales are too low and your brand is not well known enough in their area.
5. Franchise owners expect you to fix their unit level problems with employees, landlords, suppliers, insurance, local municipality, their business & operating partners. You had no idea that you'd be expected to do so much hand holding and babysitting when you set out selling & opening franchises.
6. Franchise recruitment for a new franchisor is tough. However you couldn't have imagined how difficult generating and managing leads would be. And the cost per new franchise recruited is far more than you anticipated.
7. You discovered that your management team had a much greater learning curve for transitioning your business to a franchise development and operations company. And now you're faced with some tough staffing decisions as you move forward.

This is not an exhaustive list of awful franchise things and readers can feel free to add to the list.

Good news is that you had a good underlying business at the outset. And all these franchising challenges can be remedied.

If this sounds llike your franchising story & you want some help solving your problems call me at 443.502.2636 [email protected]. Lease the talents of 20+ year proven franchise executive, who has seen and solved these problems before.