Leasing Considerations for Franchisors and Franchisees

Author: cass.lintott@lintottlaw.com

Date: APR 15th, 2014

Topic: Industry Experts

For most franchises the location of its franchised businesses is key and can make or break a franchisee. Franchisors may want to be involved in site selection and negotiation to ensure control of the location. Franchisees may want to be involved in the negotiations as they have a vested interest in the rent they will be responsible to pay.

Both the Franchisor and Franchisee should be concerned with a locations visibility and accessibility to the public. If you are considering a typical location, such as a shopping mall, research the mall itself. How much time is left on the anchor tenant’s lease, is there rumours of the anchor tenant leaving, what happened to the previous tenant?

Once a location has been selected the question becomes sublease or headlease? For franchisors who wish to maintain control of an established location, being on the headlease permits them to do so regardless of changes in the franchisee. By controlling the site a delinquent franchisee can be replaced without interruption from the perspective of the public. This control comes at the cost of being immediately liable for rent.

Alternatively, the franchisee may hold the headlease. If properly negotiated, a franchisor can still retain control of the location with the addition of a default notice/right of first refusal clause whereby the franchisor is able to step into the shoes of a defaulting franchisee. The parties involved in the negotiation process will depend on the end goal. Franchisors may assist the franchisee in negotiations or require that they are the only party involved in the discussions. From the franchisee’s perspective, the franchisor normally has more negotiation power and is able to obtain greater rental incentives. That being said, not all franchisors pass those incentives on.

Conversely, by being the only party involved in negotiations of the lease a franchisor could risk a claim from the franchisee. Proper disclosure requires that the form of sublease be attached to the disclosure document adding yet another potential claim for misrepresentation.

Franchisees should insist on being involved in the process and do their own homework. If the location was previously held by a terminated franchisee, contact that franchisee and determine why.

Franchisees should also review the term of the franchise agreement and insist that it coincides with the term of the lease or allows for adjustment with same. If the Franchisee is in the headlease, ensure that the right to assign the lease exists in the event that the franchisee wishes to sell.

Remember, you have the ability to negotiate. Consider alternative sites and let the landlord know that they will need to compete for your tenancy. Look closer at the building, is it completely occupied? If not, you may have more power to negotiate than you first thought. Lease negotiations do not end with the placement of the lease. Often there will be renewals. When that is the case the same level of research needs to be repeated as when negotiating the initial term. Market rates may have gone down or demographics shifted placing you in the position to ask for more.

Ensure that you start early enough as most leases require notice of an intention to renew months in advance of the end of the term.

Remember, at the end of the day a franchisor is successful when its franchisees are. Well thought out site selection, lease negotiations and renewals can make the difference between a successful franchisee, and a high turnover location to the detriment of all involved.