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 the franchisee)

  1. 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;
  2. 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 negotiations;
  3. 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;
  4. 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 franchisor; and
  5. 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

  1. 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 landlord;
  2. The franchisee will be responsible for the payment of the security bond/bank guarantee, and must also maintain the relevant insurances;
  3. 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
  4. 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 franchisor's goodwill.

All of these issues should be considered before committing to a lease.

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.