Australia: Making sure your lease is franchise ready in nine easy steps

Last Updated: 24 September 2015
Article by Andrew Grima

Many of our franchising clients are also tenants of premises. A big driver of the value of the franchise brand and its liability are the terms and conditions of leases of the premises occupied by your franchise businesses. Therefore, a big question you must ask yourself, is to what extent do your leases allow for a smooth transition from franchisor to franchisee, prevent duplication, and manage risk?

Here are some easy steps to ensure your lease is more franchise ready.

  1. Make it easy for the lease to pass on occupancy rights and obligations to a franchisee

As a franchisor, you will usually lease premises so you can secure the tenure and maintain control of your brand within a strategic location. As part of this process, you'll want to pass some of this risk onto your franchisee via licencing or subleasing the premises to them – granting them certain occupancy rights but requiring them to observe the lease terms and conditions.

Usually, a lease won't let you sublease or licence without landlord consent, and subject to a number of conditions, so you need to ensure that these can happen with minimal restrictions. Ideally, you'll just need to tell the landlord what you're proposing however, some landlords may require more. For instance, entering into a deed which says that you indemnify them against breaches of lease conditions by your franchisee and providing a copy of the licence to occupy a sublease.

The landlord may also need a copy of the Franchise Agreement as part of their consent – resist providing this if you can as your franchise agreement may contain conditions which you don't want to share with the rest of the marketplace.

If the franchisee leases the premises instead of you, you may need to negotiate with the landlord around stepping back into the shoes of the franchisee in the event they default or the business is sold. This can be documented by a specific clause in the lease or by separate deed.

  1. Get rid of duplication

If you're licencing or subletting to your franchisee, there will be times where it is easier for the franchisee to deal directly with the landlord. For example, if the franchisee is invoiced directly for rent, you won't need to receive an invoice for rent and then issue a separate invoice to your franchisee.

  1. Keep informed

A lease will usually state that notices can be served by the landlord on their tenant at the premises. If you've granted occupation to your franchisee, then there's a risk that notices will be served on the premises that you won't know about. This can be critical for notices regarding occupancy rights including relocation, redevelopment and breaches.

If you're unaware of what's going on, you can't respond which may have dire consequences - particularly when you're the tenant under the lease and ultimately responsible.

I would strongly recommend that the lease include that in the event that notices are served on the premises, copies should also be served to your head office, registered office, or other address as specified in the lease.

  1. Branding – your timetable versus your landlord's

A lease will usually include some form of redecoration of the premises during the life of the lease such as a complete refurbishment, repainting or refit. The lease may require this to take place every five years or upon exercise and an option to renew for a further term.

However, the timetable of refurbishment referred to in the lease may not coincide with that of your franchise model as a whole. What if the franchise is about to embark on a campaign of rebranding and this occurs shortly before or after the specified refurbishment date?

To overcome this I'd strongly recommend that your lease states that refurbishment doesn't occur during the term (and at all in the event that there is a make good that requires defit to bare shell). At the very least if there is to be a redecoration or refurbishment provision in the lease, it should be made subject to whatever your program for branding requires.

  1. Be clear on who is entitled to an incentive and restrict when that incentive can be taken away

Often a new lease will include an incentive of some form such as a rental reduction over the life of the lease or a cash contribution towards the cost of a fit out.

If you're entitled to an incentive and licence or sublease the premises, you need to consider whether to pass it onto your franchisee. If not, then when the licence or sublease piggybacks off the lease, you need to make it clear that any incentive provisions are excluded.

You also need to consider the circumstances in which the landlord can clawback the incentive. For example, documentation relating to the incentive might say that the landlord can take back either a portion or all of the incentive in circumstances such as default, assignment of lease, the tenant ceasing to occupy the premises or change in control of the tenant company.

You should try and restrict these circumstances – at the very least, it shouldn't apply in the event of change in occupation (particularly where there is a licence or sublease to a franchisee), assignment of lease or changing control of the tenant.

If the clawback provisions apply in the event of default you need to consider whether your franchisee indemnifies you for any clawback where the default has been caused by the franchisee's default.

You may also try and negotiate that this clawback can only take place within a certain period of time - such as the first three years or that the extent of the clawback reduces as the life of the term of the lease proceeds.

  1. Embargo of critical risks

A big risk when leasing premises is the ability of a landlord to either terminate the lease in the event of demolition or relocate the tenant in the event of some planned refurbishment. There are ways to manage this risk – ask questions and investigate before entering into the lease to see what is planned during the life of the lease. Another way is to negotiate that demolition or relocation can't take place until after a certain period of the term has lapsed.

  1. Make it easy to sell your brand, or take on new partners

At some point you may want to take on new partners, sell the business or undergo some other corporate restructure such as floating on a stock exchange.

Usually a lease will provide some restrictions on the ability of a tenant to change control, often stating that in the event of a change of control of a tenant company, the landlord's consent must be obtained and the same criteria that applies to an assignment of the lease would apply to a change in control of the tenant. Such restrictions may include an assessment of the incoming party who is taking equity or control of the tenant, and a requirement for the existing tenant to remain liable under lease - problematic when you want to sell your business altogether.

I would recommend that you water down such provisions as much as possible. Attempt to eliminate the requirement to obtain consent (difficult to negotiate with many landlords). In an ideal world you would simply be able to advise the landlord of the change of control but in reality this may be your starting point and you will need to give ground. Try and achieve a change of control provision which states that you would obtain landlord consent which cannot be unreasonably withheld in the event that the incoming party is not inferior to the current tenant and has sufficient financial resources. As discussed earlier you also need to ensure that such a control does not result in the clawback of any incentive, otherwise a potential purchaser of a franchisor business may view the cost of transitioning as too high.

  1. Risks at the front and at the end - traps to watch out for

In my experience, many franchisors proceeding down a growth path aim to secure key sites when they are first established.

When you secure a site you need to negotiate with the landlord around the fit out obligations. One big trap that franchisors leasing premises fall into is the amount they need to contribute to this fit out (beyond what their design and plans dictate) – for instance, altering connections to basic services such as air conditioning and plumbing may not be considered and can blow the budget.

You need to clearly establish when you need to contribute to these alterations where the basic shell provided doesn't cater for the proposed fit out. Crucially, if a franchisee is involved and contributing to set up costs, you need to let them know what these costs are.

Once the tenancy ends, there are also costs as the premises usually need to be returned to a complete bare shell. Again, it should be made clear to your franchisee if they're under a licence or a sublease whether they're responsible for such make good costs.

  1. Audit

Ultimately, if your franchise operation involves leasing premises (and usually a large portfolio of premises) there are many hidden traps which can hinder the smooth operation of your franchise model and liabilities.

As a consequence we would thoroughly recommend a member of our franchising team sit down with you and carry out an audit on your leasing documentation to ensure that it is in fact franchise ready.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.