When it comes to placing a franchisee at a particular location,
franchisors generally have two options – be the tenant or
don't be the tenant.
One of the most common lease arrangements in franchise
relationships is where the franchisor negotiates a lease for the
premises, enters into the head lease with the landlord and
subsequently sub-leases the space to the franchisee.
Landlords like the sublease model because they have the franchisors
(i.e. the party with the deeper pockets) on the hook for the lease,
which is the party they would prefer to have recourse against if
problems arise. Franchisees like the sublease model because
they obtain the benefit of the franchisor's bargaining power,
due to its size and experience, to negotiate more favourable lease
terms than the franchisee likely could on its own.
The sublease model is also an attractive option for the
franchisor because, assuming it's a desirable location, it can
retain possession of the premises as franchisees come and go over
time. There is also the added advantage that a franchisee is
less likely to compete with a franchisor post-termination of the
franchise agreement if it doesn't have the location
One of the disadvantages of subleasing is that, as is
self-evident, the franchisor is now on the lease, adding to its
list of potential obligations and liabilities. Since there is
no relationship between the landlord and the subtenant franchisee,
each of those parties has to rely on the franchisor to enforce
their respective rights. And, ultimately, a franchisee's
non-performance under the sublease (such as failure to pay rent)
will fall on the franchisor.
Where the franchisor would prefer to not enter into the lease,
the franchisee becomes the tenant, but the franchise agreement must
specify that the franchisor have a conditional assignment clause
whereby the franchisor can automatically assume the lease if the
franchisee is in default of its obligations. As a result, any
such clause should require the landlord to give notice to a
franchisor of any franchisee default. It is also critical
that the franchisor, franchisee and landlord sign an agreement
together in order for the assignment right to be enforceable.
There is no right answer to the question of whether or not a
franchisor should be a tenant on a lease for a franchised location
– it varies by preference and circumstances. Each
option carries its share of advantages and disadvantages.
None of that may matter, however, if the landlord isn't
prepared to grant that option to the franchisor and would prefer to
make the decision itself.
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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