Many franchisors are involved with leases (mainly retail leases)
in some way, shape or form. Some franchisors choose to be the
tenant under the lease, and then subsequently licence the premises
to the franchisee, while some franchisors are happy for the
franchisee to be the tenant under the lease, as their liability is
limited if the franchisee's lease is terminated. There are
positives and negatives for both sides, and set out below is a list
of these considerations to take into account.
If the franchisor is the lessee (and subsequently
licenses the property to the franchisee)
If the franchisee defaults and is subsequently ejected from the
premises, then the franchisor remains liable to the landlord for
the remainder of the term of the lease. The upshot of this scenario
is that you retain control of the premises, and you can then decide
whether to seek a new franchisee, who will hopefully be more
successful, or you can operate out of the premises yourself;
It may be important for the franchisor to be able to licence
the premises to franchisees without the consent of the landlord.
Although most landlord's 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.
Most leases will have a default period of between 7-14 days,
and if rent is not paid within this timeframe, then the landlord
has the option to terminate the lease, without notice. It is
vitally important to ensure that if the franchisee defaults in
their rental obligations under the lease, both the franchisee and
the franchisor are notified of this, and both parties have the
option to rectify the default. In the past, there have been
situations where a franchisee has defaulted under the lease, and
the lease has been terminated without the franchisor knowing about
it. If the franchisee only licenses the premises, then the landlord
will pursue the franchisor for damages following termination of the
If personal guarantees are required by the landlord, then
franchisors should ensure that these guarantees are provided by the
directors of the franchisee company, rather than the directors of
the franchisor. Again, a landlord may not agree to this, but it
should be your starting point in lease negotiations.
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 landlord. The
downside of this is that you would lose the premises and it may
result in you not having a franchise in a geographical area which
is important to your company;
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 the above points should be taken into account when
deciding whether to have the lease in the franchisor's or
franchisee's name. In our experience, most franchisors choose
the first option because they prefer to have the premises locked up
for a certain timeframe, and if one franchisee is ejected from the
premises, then the franchisor retains the premises and can always
find a new franchisee in the future.
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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