There are three main frameworks when it comes to leasing a premises in a franchise system:
- The franchisee holds the lease in their name (the franchisor may or may not have a deed or re-entry or step in deed);
- The franchisor negotiates the lease and then transfers (assigns) to franchisee; or
- The franchisor holds the lease and licenses occupation to franchisee under a licence to occupy.
Commercial considerations including the nature of the franchise system and the risk factors around the site will largely drive the decision for either the franchisee or franchisor to hold the lease.
There are advantages and disadvantages to each of the above approaches. Below, we unpack the items both franchisors and franchisees should consider before signing a lease.
1. Franchisee Holds Lease in Own Name
- Less financial risk for the franchisor;
- Less operational exposure for the franchisor; and
- Parties can more easily end an occupation licence. The franchisor can then licence a new franchisee to occupy the premises if a franchise agreement terminates or the franchisee sells the business midterm.
- Franchisee accepts more financial risk;
- More operational exposure for the franchisee;
- Franchisor lacks control over the site;
- Lack of transparency of unpaid rent and outgoings for the franchisor (i.e., franchisee may be able to hide non-payment of rent);
- Franchisor has no direct relationship with the landlord; and
- Increased complexity of the deal, with an extra layer of documentation.
2. Franchisor Negotiates Lease and Then Transfers/Assigns the Lease to the Franchisee
- Franchisor retains control of the site and negotiations for the initial lease;
- Franchisor has increased negotiating power, especially when they are leasing multiple sites across Australia with common landlord owners;
- Greater access to market information allowing the franchisor to project rental costs better;
- Transfer of financial and operational risk to franchisee once the deal has been negotiated; and
- Greater control for the franchisee once the lease is eventually in their name.
- The franchisee loses bargaining power and possible input regarding the lease’s commercial terms and conditions, noting they must simply accept the lease the franchisor has negotiated;
- Increased costs and documentation, noting a deed of assignment/transfer of lease is required;
- Potential for increased liability falling upon the franchisor for site selection (i.e., the franchisor may have to warrant site is suitable, where, if franchisee selected the site, the franchisor has no such liability); and
- Franchisor forgoes a right to access the site or take control if there are operational or other issues that may harm the franchise brand.
3. Franchisor Holds Lease and Licenses Occupation to Franchisee
- Franchisor retains control of the site and negotiations;
- Franchisor retains control of site and has ease of access for inspections of the franchise system;
- The franchisor retains a relationship with the landlord;
- Increased negotiating power for the franchisor, especially when they are leasing multiple sites across Australia with common landlord owners;
- Greater access to market information for the franchisor;
- Franchisee must only deal with one entity – the franchisor (not the landlord).
- The franchisee does not have control of the site or a relationship with the landlord;
- The franchisee must rely on the franchisor to pay rent to the landlord;
- If there is a change in the market, the franchisor or its related entity would have the rent on its balance sheet;
- If the franchisee abandons the premises or the franchise, the franchisor remains liable for the site and premises;
- Franchisor may also have operational responsibilities, such as maintenance; and
- Franchisor may have potentially increased liability for site selection.
Importantly, there are no uniform leasing laws. If a franchisor operates nationally, they should ensure that they have a working understanding of how each state and territory’s retail legislation operates. If you have any questions about your franchised business’ lease, get in touch with our commercial leasing team on 1300 544 755.