Franchising is a popular business model that allows entities to own and operate their own businesses while leveraging the established brand, support, and systems of a larger company, the franchisor. One critical aspect of the franchisor-franchisee relationship is the commercial lease. As a franchisor, you have various options when leasing premises to your franchisees, including:
- franchisee entering into the lease as a tenant;
- franchisor entering into the lease as a tenant and then licencing the franchisee to occupy the premises; or
- franchisor entering into the lease and later assigning the lease to the franchisee.
This article explores your obligations as a franchisor when leasing premises to franchisees.
Making Disclosure Statements
When leasing premises to franchisees, a critical legal obligation is to provide clear and transparent disclosures about the lease agreement’s terms. You can do this by providing your franchisees with a Disclosure Statement that includes the following information:
- the lease term;
- rent details, including review mechanisms and review dates;
- an outgoings statement; and
- additional costs in relation to maintenance and other costs payable under the lease;
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
Negotiating Favourable Lease Terms
Franchisors generally should negotiate favourable lease terms on behalf of their franchisees. This includes securing:
- reasonable rent rates;
- favourable renewal options; and
- addressing any potential pitfalls in the lease agreement.
Additionally, if you, as the franchisor, are listed as the tenant on the lease, it is important to negotiate licensing or sublease clauses that allow you you to license or sublet the premises to franchisees. Taking a proactive approach can prevent delays and allow your franchisee to operate the business as soon as possible.
Continue reading this article below the formEntering a Licence to Occupy
A licence to occupy in a franchising context refers to the legal permission a franchisor grants to a franchisee to use and occupy a specific location or territory to operate their franchised business. It is important to note that the specific terms and conditions of a license to occupy can vary depending on the agreement between the parties.
Key elements of a license to occupy in a franchising context may include:
- duration of the licence – which will often align with the franchise term;
- conditions and restrictions – these need to align with the lease and other obligations under the franchise agreement; and
- rent or licensing fees payable under the licence and lease.
Seeking legal advice can ensure you clearly define both parties’ rights and responsibilities in your agreement. The licence to occupy will form part of the ancillary documents you need to provide franchisees under the Franchising Code of Conduct.
Negotiating a Step in Deed
A step in deed allows the franchisor to ‘step in’ and take over the lease (through assignment) if the franchisee breaches their obligations under the franchise agreement or if parties terminate the agreement early. You only require a step in deed where you list the franchisee as a tenant under the lease. Importantly, during the lease negotiation stage, inform the landlord of your intention to draft a step in deed.
Similar to the licence to occupy, the franchisor has an obligation to provide the step in deed as part of the ancillary documents they must issue to the franchisee as disclosure.
Obtaining Insurance
Franchisors often require their franchisees to maintain specific insurance coverage to protect both parties in the event of unforeseen circumstances. This may include general liability insurance, property insurance or business interruption insurance. Franchisors have a legal obligation to communicate these insurance requirements and ensure that franchisees obtain and maintain the necessary coverage throughout the lease term.
Key Takeaways
As a franchisor, it is crucial that you meet your obligations under the Franchising Code of Conduct. Before your franchisee begins operations, you will need to consider leasing premises to them so they can run the franchised business successfully. You could request that the franchisee enter into the lease as a tenant, or you could enter the lease yourself and then licence, assign or sublet the premises to your franchisee. Whatever option you choose, be sure to make all necessary disclosures to your franchisee so they can begin operating as soon as possible with minimal issues and interruptions.
For more information, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to solicitors to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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