Unless the franchisee is operating a mobile franchise or working from home, chances are the franchise will require a lease on a fixed premises. Although there is no ‘one size fits all’ approach to franchising and leasing, franchisors and franchisees typically use one of three options to lease the premises:

  1. Franchisee locates the premises, negotiates the lease and holds the lease.
  2. Franchisor finds the premises, negotiates the lease, enters into the lease and then transfers the lease to the franchisee.
  3. Franchisor locates the premises, negotiates and enters into the lease, and licenses occupation to the franchisee.

The following factors will ultimately drive what leasing method a franchisor (or franchisee) chooses:

  • nature of the franchise system;
  • risks that each party is prepared to take; and
  • the level of control that a franchisor wishes to retain over the business’ premises.

We set out below some of the advantages and disadvantages of each different type of leasing option.

1. The Franchisee Locates the Premises, Negotiates the Lease and Holds the Lease

Advantages Disadvantages
Level of Control You are not responsible for the lease. As such, the franchisee is less likely to ‘blame’ you for any issues with the site. The franchisor does not have control of the premises if they are required to terminate the franchise agreement. It is always easier to terminate or transfer a franchise if the landlord franchisor retains control of the premises, particularly mid-way through a lease.
Operational Exposure The franchisor has the least risk and operational exposure of any of the options. If the tenant does not pay rent, it does not fall on the franchisor to pay it. If the franchisee stops paying rent, you may lose the site to a competitor without the landlord even notifying you. In addition, if the franchisee has a falling out with you and stops paying franchise fees, it is not as easy to force them to stop trading given they have physical control of the site. If they re-brand and continue to compete, you rely on the restraint rather than being able to physically remove them from the site. This legal action may cost significant sums if you want them to stop trading in competition with you (compared to being able to push them out if you control the site).
Finance There is no financial risk for the franchisor as the lease is in the tenant’s name and is the tenant’s responsibility. See above. If you want to enforce the restraint, it may be an expensive exercise to do so if you do not have control of the site.

2. The Franchisor Finds the Premises, Negotiates the Lease, Enters Into the Lease and Transfers the Lease to the Franchisee

Advantages Disadvantages

Level of Control

The franchisor retains control of site selection and sells the ‘package’ to the franchisee. The franchisee is more likely to ‘blame’ the franchisor if the site does not work out. Even if there is no legal issue, the franchisee may feel as though you should have known better, so it will be important to manage expectations and ensure that you don’t give them the impression that you are guaranteeing anything with site selection.
Operational Exposure There is increased exposure but also the opportunity for increased returns by selling an operating business. This has the greatest risk. You may not find a franchisee to take over the site in which case you may have to run it indefinitely. The franchisor may have increased liability for site selection, the lease terms etc. if they are not ultimately suitable.
Finance There is the ability to increase your returns should you find a willing and qualified buyer. There are significant costs of fit out and initial operation which you may not recoup on sale depending on the store’s performance.

3. The Franchisor Locates the Premises, Negotiates and Enters Into the Lease, and Licenses Occupation to the Franchisee

Advantages Disadvantages
Level of Control The franchisor retains absolute control of the transaction, site and lease. The franchisor can step in and terminate a franchise relationship and keep control of the site. This has the greatest degree of control so there are few issues here for the franchisor.
Operational Exposure The franchisor has a direct relationship with the landlord and therefore is directly responsible for rent regardless of whether the franchisee pays the franchisor. Clearly, this is a significant disadvantage — if the franchisee abandons the premises, you will be solely responsible for the rent for the remainder of the lease.
Finance The franchisor knows exactly what is happening with rental payments and will know if the landlord has an issue with payment. If the franchisee abandons the site, the franchisor will be responsible for rent and ‘making good’ the premises. This is a significant risk. The franchisee should pay a significant security deposit to cover these risks. Even then, you are still potentially exposed to loss if the franchisee abandons the shopfront.

Key Takeaways

We generally recommend that the franchisor (through a separate leasing entity) sign the lease but the franchisee provides the personal guarantee. In this way, you get the benefit of control without the risk associated with the personal liability of the lease. Of course, there is still the responsibility of the leasing company to pay rent if the franchisee abandons the site, but at least the franchisor does not wear any personal liability in relation to the lease. 

The precise circumstances of your business should determine which option you adopt. If you have any questions or need assistance determining the best option for your particular circumstances, get in touch with our franchise lawyers on 1300 544 755.


The Ultimate Guide to Setting Up a Franchise

Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.

This Toolkit also contains case studies from leading franchisors including leading Australian franchises including Just Cuts, FlipOut and Fibonacci Coffee.

Download Now

COVID-19 Business Survey
LegalVision is conducting a survey on the impact of COVID-19 for businesses across Australia. The survey takes 2 minutes to complete and all responses are anonymous. We would appreciate your input. Take the survey now.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. For just $199 per month, membership unlocks unlimited lawyer consultations, faster turnaround times, free legal templates and members-only discounts.

Learn more about LVConnect

Emma Heuston
Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

  • By submitting this form, you agree to receive emails from LegalVision and can unsubscribe at any time. See our full Privacy Policy.
  • This field is for validation purposes and should be left unchanged.
Our Awards
  • 2019 Top 25 Startups - LinkedIn 2019 Top 25 Startups - LinkedIn
  • 2019 NewLaw Firm of the Year - Australian Law Awards 2019 NewLaw Firm of the Year - Australian Law Awards
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review 2020 AFR Fast 100 List - Australian Financial Review
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer
Privacy Policy Snapshot

We collect and store information about you. Let us explain why we do this.

What information do you collect?

We collect a range of data about you, including your contact details, legal issues and data on how you use our website.

How do you collect information?

We collect information over the phone, by email and through our website.

What do you do with this information?

We store and use your information to deliver you better legal services. This mostly involves communicating with you, marketing to you and occasionally sharing your information with our partners.

How do I contact you?

You can always see what data you’ve stored with us.

Questions, comments or complaints? Reach out on 1300 544 755 or email us at info@legalvision.com.au

View Privacy Policy