Potential franchisees must consider many things before purchasing a franchise business. Franchisors control the larger system in which you’ll be part of. This article looks at how far the franchisor’s control extends into the lease of premises for a franchise business. It examines three separate models for a franchise lease arrangement.

The Franchisor Enters the Lease and then Transfers it to You

The first franchise lease model involves the franchisor locating premises and entering into a lease. Then they transfer the lease to the franchisee.

In this scenario, the franchisor is taking on the initial obligations and liabilities of the lease agreement. They will be liable for the rent until they transfer the lease. Franchisors will often locate “favourable” premises, enter into lease agreements for the store and start operating the business as a corporate outlet. They will then sell the ready-made site to a franchisee. However, the franchisor remains liable for the rent if no franchisee is found.

When the franchisee purchasers the business, the lease transfer will be done by a “Deed of Consent to Assignment and Assignment”.  The landlord prepares this document at the tenant’s expense. Once assigned, the franchisee as new lessee will become bound by all the terms of the original lease agreement.

As a franchisee, it is important that you review the original lease agreement. You must understand the leasing rights, options and liabilities and go in with your eyes open.

The Franchisor Enters the Lease and then Grants You a Licence

The second franchise lease model also starts with the franchisor entering a lease. However, they then grant the franchisee a licence to occupy. This is a far more common franchise lease model.

The franchisor remains the lessee under the lease agreement for the duration of the lease. Therefore, this arrangement gives the franchisor the most control but also significantly reduces the franchisee’s liability. In this model, the franchisor must pay rent, not the franchisee.

The franchisor will also be liable for all other obligations under the lease agreement as if they were the lessee. These obligations include outgoings, promotion levies, maintenance and repair to name but a few. In effect, this means that if a franchisee vacates the premises (or the franchise agreement ends), the franchisor will retain the lease until they locate a new franchisee.

The Franchisee Enters and Holds the Lease

Sometimes a franchisee locates premises, negotiates and enter the lease directly with the landlord of the premises. The franchisor will often retain the right (by way of the franchise agreement) to approve of the premises and require standards of fitout, but otherwise the franchisor is not involved in the landlord/tenant relationship.

This third franchise lease model gives the franchisor the least risk and allows the tenant the highest level of control. However, it also means that a franchisor will not necessarily have the ability to recover the site or stop a franchisee from operating the store outside of the franchise’s branding if the franchise agreement ends. The exception is unless there is a step in clause or other protections set out in the lease.

Key Takeaways

Regardless of the franchise lease model, you will have some liability for the lease or rent if a physical premises is required.  As such, you should understand the different levels of control and liability you will have under the leasing option nominated by the franchisor. To get advice on the terms of your lease agreement or occupancy licence, get in touch with LegalVision’s franchise lawyers today on 1300 544 755 or fill out the form on this page.

Jonathan Muncey
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