When you enter into a franchise, the most important document you sign is the franchise agreement. However, if the franchise you are entering into is situated in the one location, i.e. based in one premises, the lease agreement becomes just as important. The idea is to have your franchise lawyer review both documents and make the necessary amendments so the dates, term and renewal options correspond with one another. This way you will never find yourself in a situation where your lease is ending but your franchise agreement still has a year before it ends.
When you and your lawyer (and any financial advisers) are looking over the legal/financial paperwork when conducting Due Diligence of a particular franchise business, remember not to overlook any provisions that relate to tenant obligations, specifically performance as a tenant.
Important things to look out for
- What is the process for obtaining the franchisor’s approval? Are they merely assisting you to choose an appropriate location for the business, or are you required to present the location upon finding it and then subsequently seek their consent in writing?
- Make sure that any renewal options and the lease terms are aligned with the franchise term and its options. As previously mentioned, if you do not check the franchise agreement and lease agreement match up in terms of dates, terms and options, you could find yourself either without a site to run the business, or having to continue paying a lease without actually having any business to run. These scenarios are expensive and avoidable.
- That the franchisor approves the site fit out, as this sometimes requires the franchisor’s contractors to carry out the work. You might find that your franchisor has included a flat fee in the franchise agreement to carry out all fit out work on your behalf.
- That the franchisor actually approves the lease and its terms. It is not uncommon for the franchise agreement to make contingency clauses that require the inclusion of certain terms in the lease agreement. Your responsibility is to ensure that the lessor is fully informed as to the specifics of these clauses. To ensure the inclusion of these clauses, it’s good time to bring this up is during the negotiations phase.
- Does the franchisor want to have the lease in their own name (or that of a related entity) to then sublet/licence the premises as head lessee and sub lessor? In this scenario, where a licence agreement may be in place, the terms of such an agreement will typically dictate that the lease terms will apply to the franchisee under the licence agreement. Keep in mind the lack of flexibility this option offers in terms of negotiating the terms of the lease agreement.
What else needs to be considered?
In addition to the above considerations, there are some additional things you will need to take into account as the franchisee entering into a commercial lease and ultimately a franchise relationship. These include, but are not limited to, the following:
- Does the lease agreement or the franchise agreement require the premises to be refurbished at any point during the term of either document? If so, is this requirement reflected in both documents?
- Does the franchise agreement have a provision that relates to the franchisor becoming bankrupt? If so, does this sufficiently protect your interests as franchisee of the business and lessee of the premises?
- Do you have third party assignment rights? What are the terms relating to these rights? Are they sufficiently flexible to protect your interests? Is there alignment of the assignment clauses in both the lease agreement and the franchise agreement? Check that each agreement contains provisions that ensure both landlord and franchisor are reasonable when considering whether to grant approval of an assignment of rights and obligations under either agreement. This will make it easier for you to sell the business at some point in the future.
The above considerations need to be covered during the negotiation stages, and do not cover all the situations whereby a lease agreement and a franchise agreement may overlap and impact one another. If you are unsure about what you need to be looking for when considering entering into a franchise relationship, simply contact our franchise legal team on 1300 544 755. Our franchise lawyers are highly skilled and specialists when it comes to drafting and reviewing the terms of the various franchise documents.