When starting or continuing a franchise, one of the most
important decisions you will need to make is who is going to take
on the responsibility of the lease. As franchisor, should you take
on the lease and licence the premises to a franchisee, or should
all of the lease obligations fall directly on the franchisee? Some
important factors to consider are:
If the franchisor is the lessee (and licenses the premises to
If the franchisee defaults and is subsequently evicted from the
premises, then the franchisor remains liable to the landlord for
the remainder of the term of the lease;
It may be important for the franchisor to be able to licence
the premises to franchisees without the consent of the landlord.
Although most landlords will want to retain some control, this
should be the franchisor's starting position in lease
Normally, the landlord will want to see a copy of the franchise
agreement before they agree to consent to a licence. As this is a
confidential document which illustrates the structure of your
company, this should be resisted;
Even though the licence will likely pass on the make good
obligations to the franchisee, if the franchisee defaults and the
licence is terminated, these obligations will then fall on the
It may also be important that the proposed franchisee provides
the bank guarantee/security deposit and the relevant insurances. At
the beginning of the transaction, this should be made clear by the
franchisor, so as to avoid any protracted negotiation after the
lease has been issued.
If the franchisee is the lessee
If the franchisee defaults under the lease, then the franchisee
remains liable to the landlord for the remainder of the lease. In
this regard, the franchisor has no obligations to the
The franchisee will be responsible for the payment of the
security bond/bank guarantee, and must also maintain the relevant
The franchisee must make good the premises at the end of the
lease, which can be a very expensive exercise. However, the trade
off is that the franchisor loses control of the site, which may be
important to the franchisor if the location of the premises is
vital for the goodwill of the company; and
The franchisor should try and include a 'step in'
clause into the lease or side agreement. Essentially, this means
that if the franchisee's lease is terminated, the franchisor
may 'step in' to the premises and either continue the
business or licence the premises to another franchisee. This will
ensure that the landlord cannot re-enter the premises and result in
the franchisor losing the site, which is very important to all
All of these issues should be considered before committing to a
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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