Franchised businesses come in all shapes and sizes. There are mobile franchises, exclusive territory franchises and franchises that operate in a non-exclusive area from a specified premises.
In the case where a franchise operates from a particular premises, the parties will need to enter into additional agreements on top of the franchise agreement to occupy the premises.
The Lease Documents
If a lease is required, the first threshold question that must be resolved is, who will hold the lease – the franchisee or the franchisor?
This issue is not a “one size fits all” answer. In fact, franchised businesses around Australia operate from a mixture of premises either leased directly by the franchisee or leased in the name of the franchisor. If the franchisor is named as Lessee, a further document known as a “Licence to Occupy” will also be required for the franchisor to confer the right to occupy the premises upon the franchisee. This document effectively places the franchisee in the shoes of the franchisor as if they were the tenant under the Lease.
Ultimately, it will be up to the discretion of the franchisor and how much control they wish to exercise over the franchisee. If the franchisor controls the Lease and the premises, it is easier to remove a franchisee for breach of the franchise agreement and/or lease and replace them with a new franchisee. The franchisor may also have better bargaining power and lease negotiation skills if it is a large franchise. Sometimes franchisors also like to ensure consistency across their portfolios, and by acting as the tenant under a Lease, they can ensure the Leases are consistent as to “permitted use” and franchisee clauses.
Importantly, the party who holds the lease will ultimately be conducting lease negotiations. If it is the franchisor, there is a risk that the franchisee may become marginalised or excluded from negotiations. This means they are forced to accept whatever the franchisor negotiates on their behalf.
To avoid this happening, we suggest that all franchisees become involved in this process and ask to review or draft documents for input to ensure that the lease terms are favourable to the franchisee, given that they will be paying the rent each month.
If possible, these documents should be reviewed at the time the franchise agreement is reviewed. Once a franchise agreement is signed, the franchisee may be forced to accept the terms of the lease. If all documents are reviewed together, the franchisee can make a clearer decision.
Regardless of who is named as the tenant on the lease (the franchisee or the franchisor), the franchisee will inevitably be required to provide a personal guarantee for the obligations of the company. They must also provide a security deposit or bond for their obligations under the lease (and the Licence to Occupy where applicable).
Before a franchisee offers up a personal guarantee, legal and accounting advice should be obtained to ensure that they understand their exposure to any potential risks.
Who gets the rental incentive payment?
When negotiating commercial (or retail) leases, it is common for the landlord to provide a lease incentive to entice the tenant to lease the premises. This will usually be in the form of a cash payment to assist the tenant fit out the premises and may also involve a rent-free period.
The franchisor and franchisee must be clear as to who will be receiving this money and what it will be applied for. Any fitout incentive deed must be reviewed carefully. Importantly, sometimes the conditions of a fitout incentive deed state that if a tenant vacates the premises or the lease is assigned within a certain time period during the initial term, the rental incentive (or a part of it) must be paid back to the Landlord.
Franchise agreements and lease arrangements are closely intertwined, and expert legal advice should be sought before a franchisee enters into any of these agreements. Call one of our leasing and franchise lawyers today on 1300 544 755. You won’t regret it.