Today in our “Franchise Lawyer Special” series: Most franchise businesses will operate from leased premises. Franchisees either lease a commercial premises directly or the franchisor leases the commercial premises and licences it to the franchisee for the term of the franchise. Large shopping centres often prefer to lease their premises to known franchisors as opposed to individual franchisees.
It is important to ensure that the lease term corresponds with the franchise term. Another consideration is to ensure the lease provides for an option to renew for a period which coincides with your renewal rights under the franchise.
Right to Licence
Some leases do not allow the tenant to assign or licence the agreement without the written consent of the landlord. If the franchisor is leasing the premises directly and licencing it to you, you should request an amendment to the lease to allow the franchisor to licence, sublet or assign the lease to a franchisee.
There is often an obligation on you as franchisee to fit out the premises as directed by the franchisor. You should ensure that the landlord has consented to any fit out required under the franchise agreement. The landlord sometimes agrees to a fit out contribution. You should ensure this is documented in the Lease or Agreement for Lease.
If there is a demolition clause it should be reasonable. Usually under such a clause the landlord can terminate the lease at any time if they want to demolish the premises, by giving reasonable notice. To be fair this clause should provide that the landlord will pay you at least the depreciated value of your contribution to the fit out of the premises.
Similarly, if there is a relocation clause it should be reasonable. Under this clause the landlord can usually relocate the business to another location within the same shopping centre, for example, if there is a refurbishment which requires vacant possession of your premises. Again the landlord should pay you by way of compensation the cost of dismantling and reinstalling any fixtures and fittings.
We have highlighted some of the issues you should consider when leasing the premises for your franchise business. This is only a brief overview and we recommend you seek legal advice from franchise solicitor before committing to any lease arrangement.