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Buying a franchise is a decision that will involve a number of different stakeholders. Each stakeholder has a vested interest in the success of your business. If you are buying an existing franchise, you can undoubtedly expect to interact with the franchisor. They will assess your ‘fit’ with their brand and whether you are a suitable applicant for joining their franchise network. In addition, if you are interested in buying a premise-based franchise, requiring you to operate the business from a physical office or retail space, you can also expect the landlord of the premises to require you to satisfy their tenant criteria. It is important to understand there are different ways to obtain approval from the franchisor and for the landlord to grant you the required permissions for operating your business on their premises. This is particularly true if you are a first-time business owner.

This article will discuss the general requirements on the buyer to obtain approval from the franchisor and landlord, including:

  • assignment of the lease vs a new lease; 
  • standard assignment provisions in a lease; and
  • standard assignment provisions in a lease to be set out in your franchise agreement.

Assignment of the Lease vs New Lease

There are three key ways for the prospective franchisee to obtain the required legal right to operate the business from a particular premises. These include where the:

  1. landlord offers you a new lease;
  2. landlord permits the current tenant to assign the existing lease to you; or
  3. franchisor holds the lease and grants you a licence to occupy the premises.

Ultimately, this decision is usually not up to you or the existing franchisee. It is the landlord who can decide which of the above arrangements is most suitable for them. Nevertheless, it would be beneficial to ask the existing franchisee, as early as possible, about the terms of their current lease to understand:

  • what their current payment arrangement is with the landlord;
  • how many years are remaining on the lease;
  • whether there are any renewal options;
  • if the first term has nearly expired and the lease is coming up for renewal soon;
  • what the timeframe for exercising your option to renew is;
  • whether they have been previously required to fix, repair or update any of the fittings on the premises; and 
  • if there is a requirement to refurbish the premises on renewal.

The above guidance will provide you with some indication of the terms the landlord may offer you and, therefore, whether the business is a viable purchase for you financially. 

Taking Over the Existing Lease

In particular, if the landlord offers you the opportunity to take over the existing lease, these questions will be imperative to clarify the terms. There may be some opportunity to vary the terms of the existing lease, provided the landlord agrees to the variation. However, the general risk with having the existing lease assigned to you is that you will not have the benefit of the full lease term. Additionally, the greater the number of years remaining on the lease, the greater the certainty of the business owner over the rental payments and permitted occupancy. These are all important factors that can go towards the future valuation of your business.

Obtaining Approval From the Landlord

In each of the three arrangements above, you will be required, as the buyer and prospective tenant, to satisfy the landlord that you will be a suitable applicant. A landlord has a different vested interest to the seller or the franchisor. They can request from the existing franchisee, with whom an existing lease is current and on foot, information about you to satisfy themselves that you have good financial standing. You should not assume that you will obtain approval from the landlord by virtue of paying to acquire the franchise business. Simply put, without approval from the landlord, the existing franchisee cannot sell their business.

Standard Assignment Provisions in a Lease

Commonly, a lease agreement will confer a right on the landlord to require the current franchisee (lessee) to comply with various ‘pre-conditions’ before they consent to an assignment. In particular, the landlord may require the current franchisee to complete some of the following steps: 

  • requesting from you information relating to your financial position, good character and prior business experience;
  • paying all the landlord’s costs associated with making further enquiries into your financial position and character background;
  • paying all rent up until the day of the proposed transfer; and
  • remedying any breach of lease that may have occurred.

Retail Lease

The retail leasing legislation may apply to the premises. If so, the law generally imposes an obligation on the landlord to act reasonably when:

  • assessing the information provided; and
  • considering a request to transfer the lease.

For example, in New South Wales, the Retail Leases Act requires the landlord to deal expeditiously with a request for consent. Therefore, if a landlord has not given notice in writing to the tenant either consenting or withholding consent to an assignment within 28 days after the request was made, the landlord is taken to have consented to the assignment.

Remedy of Breaches

Furthermore, you should understand that it is the responsibility of the current lessee to remedy any breach of the lease prior to assignment. It should not be your responsibility and is a factor outside of your control. For example, any paintwork, repair or general maintenance to the premises that is not a structural issue must be attended to by the current lessee. Additionally, any improvements to the premises which were made without following the process for obtaining the landlord’s consent may, at this time, be queried by the landlord.

The Franchisor Holds the Lease Directly. What Does This Mean for Me?

Often the franchisor will have played an active role in finding, negotiating and approving a suitable location for each new franchise business. In some cases, the franchisor may even enter into the lease agreement directly with the landlord. What does this mean for you?

If the current franchisee is not the lessee to the lease of the premises for the franchise business, then this is likely to simplify the process for you.

As a matter of practicality, if the franchisor does not object to your financial position, good character and prior business experience, the landlord should also not have reason to object to you taking over the lease. However, some franchisors may be in a phase characterised by a more aggressive growth strategy to growing the network. Therefore, they may be less discerning or selective as to the suitability of a franchisee to successfully run a franchise business within their network. However, generally, a franchisor will take a lot of care to select the right franchisees who appear to have the capability to operate the business well. These considerations usually align with the landlord’s interests in dealing with an honest tenant, capable of operating a thriving business that generates adequate income to pay the rent. 

Standard Assignment Provisions in a Franchise Agreement 

When you communicate with the current franchisee, it is easy to overlook the fact they do not own the intellectual property required to operate the business. This is the defining characteristic, and indeed often the competitive advantage, of buying a franchise rather than an independently-owned business. However, the franchise agreement the current franchisee entered with the franchisor will only confer to the franchisee a conditional right to sell the business. 

It is a standard provision in a franchise agreement that a franchisee must not transfer or attempt to transfer their rights and interests in the franchise business without applying for the franchisor’s consent through a formal process. The franchisor will usually consent to transfer of the terms of the franchise agreement to a buyer (and prospective franchisee) where you provide sufficient information to demonstrate that the buyer:

  • meets the franchisor’ selection criteria; 
  • has appropriate business experience;
  • is solvent; 
  • is likely to meet their financial obligations under the franchise agreement; 
  • undergoes the required training; and
  • provides any guarantees and indemnities that the franchisor reasonably requires.

Response Timeframe

The assignment provision will generally provide a specific timeframe within which the franchisor must provide a response. This response will either be consenting or not consenting to your suitability for their franchise network. A common time frame is 42 days. Notably, the franchising code does not permit the franchisor to unreasonably withhold consent. 

Cooling-Off Period

Moreover, there is a 14-day cooling-off period. This applies to the purchase of an existing franchise where you are requesting an assignment of the existing franchise agreement. The franchising code entitles you, during the cooling-off period, to notify the franchisor in writing should you change your mind. This will allow you to terminate the franchise agreement. On receiving notice from you, the franchisor must also arrange a refund of eligible payments made to the franchisor.

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What Happens if I Do Not Obtain the Required Approvals?

Ultimately, failing to obtain the franchisor’s consent can jeopardise the sale. This is because you will not have the right to operate under the franchise brand. Prior to obtaining the consent of the franchisor, it is imperative that you are aware of the risks of: 

  • proceeding to buy a business and associated assets; or 
  • committing to taking over the lease.

Should I Buy a Business and Its Associated Assets First?

Suppose you take the first approach and sign an agreement, committing to buy a business and its associated assets prior to obtaining the franchisor’s consent, and that consent is withheld. Then, you should understand that you will need to ‘debrand’ the business after settlement. If you choose to continue operating the business using any of the intellectual property of the franchisor, you will run the risk of being accused of infringing their copyright or exclusive trademark rights. The process of debranding will involve an unexpected expense to you and may involve: 

  • removing signage;
  • repainting over ‘signature’ brand colours; or
  • significant fit-out replacements. 

Furthermore, the inability to operate a business without the name of the franchise network may fundamentally change the financial viability of the business. This is because the client and consumer perception of the quality of your goods and services may change.

Should I Take Over the Lease or Enter a New Lease First?

Similarly, suppose you take the second approach and sign an agreement that commits you to take over the lease or enter into a new lease prior to obtaining the franchisor’s consent. In that case, you will need to continue running the business under another name for the duration of the lease. Early termination of a lease can be difficult, and until alternative arrangements are agreed with the landlord, the obligation to pay the rent for the duration of the lease will fall on you.

Key Takeaways

You can progress your business purchase more efficiently by being aware of: 

  • each stakeholder you will need to liaise with; and 
  • the criteria you must meet to obtain franchisor and landlord approval. 

It may be helpful for you to speak with all relevant parties as early as possible to understand their expectations. Further, perhaps ask for a copy of the franchise agreement or lease to be clear on the process for obtaining the consent of the franchisor and landlord, respectively. If you decide to sign any contracts prior to obtaining the consent of all the parties, this poses a significant risk to you. If you would like to understand the franchisor and landlord approval process or would like assistance with buying a franchise, contact LegalVision’s franchising lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What is the cooling-off period?

The 14-day cooling-off period under the franchising code applies to the purchase of an existing franchise. It allows you to terminate the agreement during this time by notifying the franchisor in writing, should you change your mind.

If I pay to acquire the franchise business do I automatically get approved by the landlord?

No, you should not assume that you will obtain approval from the landlord by virtue of paying to acquire the franchise business. Without approval from the landlord, the existing franchisee cannot sell their business.

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