There are two basic ways that leasing arrangements are structured in a franchise agreement:
- you lease directly through a landlord; or
- the franchisor holds the lease and grants you a licence to use the premises.
Leasing directly through a landlord
If you choose to enter into a lease with the landlord of the premises, you need to be aware that you have separate obligations to your landlord and to the franchise. You will be solely responsible to negotiate the terms of the lease and satisfy your requirements under the lease, including paying rent.
One of the most important things to do is to make sure that the term of the franchise agreement and the lease agreement end at the same time. You don’t want to find yourself in a position where you need to vacate the property and are in breach of your duties under the franchise agreement.
Licencing the premises from the franchisor
If a franchisor has an existing lease over a premises they will likely offer to give you a licence to use those premises. It will be the franchisor that bears the risk should something go wrong so they may ask you to provide a personal or bank guarantee to insure themselves against damage or non-payment of rent. Be sure to direct any permission requests, complaints and queries to the franchisor and not to the landlord.
Alternatively, the franchisor might sub-lease the property to you. In either event, you will have a clear legal obligation to pay rent to the franchisor.
What is the difference between a licence and a sub-lease?
Generally, a sub-lease provides you with greater rights and autonomy than a licence. A licence allows you to use the premises for a specified purpose, whereas a sub-lease creates a relationship between you and the landlord and gives you the right to exclusively possess the premises.
Permitted use clauses
If you are leasing directly from the landlord you need to read the lease agreement to ensure that the intended purpose of your business fits within the permitted use provision. You would be surprised at how many times people run into trouble by not reading their commercial lease thoroughly.
It is also important to check the commercial lease agreement to make sure that you will be allowed to put up any relevant signage and make the changes you need in order to run your franchise business.
Before making any changes to the premises it is best to know the state that the lease agreement requires the premises to be in in when you vacate at the end of your lease period. Spending a little bit of extra time thinking this through at the beginning of the lease may save you a lot of time and money at the end!
Options to Renew
Keep a close eye on the options for lease renewal clauses in the lease agreement. Usually there is a procedure you have to follow, criteria you have to meet and a notice period during which time you have to give your intention to renew – if you do not comply with these criteria the landlord is within their rights to refuse your lease renewal request.
Remember that it is your choice whether or not to enter into a contract and you are allowed to say ‘no’ to an agreement that you aren’t happy with. The franchisor and landlord are business people and they are prepared to work for your business!
What if I have problems with my franchise or lease agreement?
In most cases the franchisor or landlord will be more experienced at dealing with disputes and negotiating deals than you will be. For these reasons it’s important to seek professional financial or legal advice to clarify your rights and obligations and assist you in your negotiations with your franchisor and / or landlord.