What are the potential risks associated with Beard Papas' noncancelable lease agreements?
Beard_Papas Franchise · 2025 FDDAnswer from 2025 FDD Document
For the years ended December 31, 2023 and 2022, the Company incurred rent expenses under noncancelable lease agreements of approximately $168,000 and $70,000, respectively.
Franchisee will be solely responsible for selecting the site(s) for the Franchisee's Shop Locations. In accordance with the terms and conditions of each respective Franchise Agreement, Franchisee must obtain Franchisor's prior written approval as to each potential Shop Location selected by Franchisee. Franchisee will retain an experienced commercial real estate broker or salesperson who has sufficient experience in locating Shop sites to locate, acquire, purchase or lease the site for the Franchisee's Development Shops. Accordingly, no provision of this Agreement will be construed or interpreted to impose any obligation upon Franchisor to locate a site for the Development Shops, to assist Franchisee in the selection of a suitable site for the Development Shops, or to provide any assistance to the Franchisee in the purchase or lease of the site for the Development Shops.
Franchisee will not lease, purchase or otherwise acquire a Shop Locations for the Development Shops until such information as Franchisor may require regarding the proposed site has been provided to Franchisor by Franchisee and has been approved by Franchisor. Information requested by Franchisor may include, without limitation, information regarding the proposed Shop Location as to accessibility, visibility, potential traffic flows, lease terms and other demographic information. Franchisee shall not enter into any lease or purchase agreement with respect to any proposed Shop Location until Franchisor has approved the site.
Landlord and Tenant both agree that Tenant shall not be permitted to transfer, sublease, encumber and/or otherwise assign Tenant's interests in the Lease and/or the Leased Premises without the prior written consent of Franchisor. Without limitation to the foregoing, among other things, Tenant agrees that if Tenant wishes to transfer any interests in the Lease or the Leased Premises that Tenant must request the written
consent of Franchisor. If Tenant requests Landlord's consent to Tenant's amendment, transfer and/or assignment of Tenant's interests in the Lease and/or the Leased Premises and if Landlord is inclined to approve of such amendment, transfer and/or assignment that Landlord shall condition Landlord's approval upon Tenant also obtaining written consent from Franchisor.
Upon the occurrence of (a) the termination, for any reason, of the Franchise Agreement; (b) the expiration, without renewal, of the Franchise Agreement; (c) Franchisor's exercise of Franchisor's Right of First Refusal granted to Franchisor in the Franchise Agreement; (d) Tenant's default under the terms of the Lease; and/or (e) Tenant's failure to exercise an option period under the terms of the Lease, Tenant and Landlord acknowledge and agree, that:
Franchisor will have the option, but not the obligation, to assume or renew the Lease and the occupancy of the Leased Premises, including the right to sublease to another Franchisee of the Beard Papa's Franchise System, for all or any part of the remaining term of the Lease and, in connection with said assumption, Franchisor will not be obligated to pay to Landlord more than two months past due rent, real estate taxes and common area maintenance charges. In the event Franchisor assumes Tenant's leasehold interest in the Lease pursuant to the terms of this Agreement and subsequently assigns the Lease and its leasehold interest to a Beard Papa's franchisee approved by Landlord, Franchisor shall not be responsible for any obligations, debts, liabilities or payments arising and/or accruing under the Lease after the effective date of such assignment. Landlord agrees that any assignment of the Lease and Tenant's leasehold interests in the Lease by Tenant to Franchisor and/or assumption by Franchisor of the Lease and such leasehold interests shall not require Landlord consent and shall not require any payment of any assignment fee or similar charge or result in any increase in rent or other fees as a result of such assignment and/or assumption.
Source: Item 23 — RECEIPTS (FDD pages 58–275)
What This Means (2025 FDD)
According to Beard Papas's 2025 Franchise Disclosure Document, the company itself has rent expenses under noncancelable lease agreements. For the years ending December 31, 2023, and 2022, Beard Papas incurred rent expenses of approximately $168,000 and $70,000, respectively. This indicates a financial commitment that Beard Papas takes on, and franchisees may face similar obligations.
As a Beard Papas franchisee, you are solely responsible for selecting the site for your shop. Beard Papas requires prior written approval of your chosen location. You must provide information regarding the site, including accessibility, visibility, potential traffic flows, and lease terms. You cannot enter into any lease or purchase agreement until Beard Papas approves the site. This approval process aims to ensure the location meets Beard Papas's standards, but the responsibility for finding a suitable site and negotiating favorable lease terms falls on you.
These noncancelable lease agreements present a financial risk. If the Beard Papas location underperforms or if the franchisee needs to close the business for any reason, the franchisee remains obligated to fulfill the terms of the lease. This could mean continuing to pay rent for a location that is no longer generating income, potentially leading to significant financial strain. The Lease Agreement Rider also states that the landlord and tenant agree that the tenant shall not be permitted to transfer, sublease, encumber and/or otherwise assign Tenant's interests in the Lease without the prior written consent of Franchisor. This limits the franchisee's flexibility to exit the lease, even if they find a suitable replacement tenant, as Beard Papas's approval is required.
However, the Lease Agreement Rider does provide some protection for Beard Papas. Upon termination or expiration of the Franchise Agreement, or in the event of the tenant's default under the lease, Beard Papas has the option to assume or renew the lease. This allows Beard Papas to maintain control over the location and potentially sublease it to another franchisee. In the event Beard Papas assumes Tenant's leasehold interest in the Lease pursuant to the terms of this Agreement and subsequently assigns the Lease and its leasehold interest to a Beard Papa's franchisee approved by Landlord, Beard Papas shall not be responsible for any obligations, debts, liabilities or payments arising and/or accruing under the Lease after the effective date of such assignment. Landlords agree that any assignment of the Lease and Tenant's leasehold interests in the Lease by Tenant to Franchisor and/or assumption by Franchisor of the Lease and such leasehold interests shall not require Landlord consent and shall not require any payment of any assignment fee or similar charge or result in any increase in rent or other fees as a result of such assignment and/or assumption.