In Short
- A lease grants exclusive rights to occupy a property, while a licence offers non-exclusive usage rights.
- Franchisees can lease premises directly or operate under a licence from the franchisor.
- Ensure the lease or licence duration matches the franchise agreement to avoid operational disruptions.
Tips for Businesses
Before signing a lease or licence, review all terms carefully. Align the agreement’s duration with your franchise term, and understand your obligations regarding rent, maintenance, and potential renewal options. Consult a legal professional to ensure the agreement supports your business goals.
Table of Contents
- What Is a Lease?
- What Is a License Agreement?
- Finding the Franchise Premises
- Taking Over an Existing Franchise Location
- Leasing and the Franchising Code of Conduct
- What Happens When My Franchise Agreement Ends?
- What Are the Benefits and Risks of a Lease Agreement?
- Key Takeaways
- Frequently Asked Questions
If you are considering purchasing a premise-based franchise, you must be aware of how the different leasing arrangements operate. These agreements are long-term commitments, and leasing costs can be a considerable expense for a franchisee. This article will discuss and compare lease agreements and license agreements for franchisees like yourself.
What Is a Lease?
A lease is a formal contract that creates an agreement between a lessor and lessee or landlord and tenant. It sets out both parties’ rights and obligations. Leases will typically contain clauses for:
- the payment of rent;
- the length or term of the lease; and
- other issues for maintenance and repair.
In the context of franchising, a franchisee or franchisor can enter into a lease. If entered into by the franchisor, the franchisor will issue franchisees with a license agreement for the premises.
What Is a License Agreement?
Some franchisors will enter the leases on behalf of franchisees. They will then provide you with a license agreement for the premises. A licence agreement allows the use and occupancy of part or all of the premises. The licensor will typically have entered the head lease with the landlord. For example, licences are common where a third party occupies the premises.
A license agreement will contain critical obligations under the lease and will likely be linked to the franchise agreement. It will include clauses setting out the licensed area in relation to the length, licence fee and outgoings.
Continue reading this article below the formFinding the Franchise Premises
The type of premise and location will depend on the service your franchise business is offering. The location of your premises must be within your specified territory, as stated in your franchise agreement. There are a number of options available for securing your franchise premises outlined in the table below:
| Characteristics | |
| Franchisee Leasing Premises | • this is one of the more common options in franchise networks; • the premises must be based within the franchise territory; • the franchisor will likely need to approve the premises or assist you in finding them; • it is essential to ensure that the lease term corresponds with the franchise term; and • the franchisee will be liable to the landlord for payment of rent. |
| Franchisor Leasing Premises | • the franchisor will find the premises; • the franchisor will license the premises to the franchisee for the term of the franchise; • the franchisee will be liable to the licensor or franchisor for the payment of rent; and • if the franchise agreement is terminated, the licence agreement will also be terminated, and the franchisor can take possession of the premises. |
| Buying the Premises | • this can be expensive and is uncommonly used by franchisees; and • the franchisor may not permit it. |
Taking Over an Existing Franchise Location
Purchasing an existing franchise requires taking over the lease on the premises through a deed of assignment. This deed transfers the lease rights from the existing franchisee (tenant) to you, the purchaser (new tenant). The deed grants you all the rights of the previous tenant for the remaining lease term. However, it also binds you to the same obligations and conditions as outlined in the original lease agreement.
Assignment of the lease will typically require landlord approval. The landlord may need to assess the suitability of the purchaser as a new tenant. For example, the landlord will usually request the following from the purchaser to assess their suitability as a tenant:
- financial information such as bank statements;
- business history or CV; and
- professional references.
Leasing and the Franchising Code of Conduct
The Franchising Code of Conduct (the Code) sets out the disclosure and service requirements relating to leasing and licensing arrangements.
| Requirements | |
| Franchisee Leases Premises From the Franchisor | The franchisor must give the franchisee a copy of the lease within one month after the document is signed. They must outline any financial benefit they will receive. Additionally, they will provide details on the party giving the benefit. |
| Franchisee Licenses Premises From Franchisor | The franchisor will provide the franchisee with: • a copy of the documents granting them the right to occupy the premises; • written details outlining the conditions of occupancy; and • a clear explanation of any financial benefits they will receive during their occupancy. The license agreement must also be provided to the franchisee. This must be completed within one month of signing the lease or agreement to lease. |
Failure to provide franchisees with the relevant information within one month of signing the lease, or agreement to lease, can be deemed a breach of the Code, which could result in the franchisor being issued with a penalty.
What Happens When My Franchise Agreement Ends?
If you entered a licence agreement with the franchisor, the lease terms will typically align with the terms of your franchise agreement. However, you could also be liable for damages under the licence agreement upon any early termination.
Alternatively, if you hold the lease, the franchisor loses significant control of the site when you leave the franchise network. However, suppose you plan to stay in business at the location and benefit from the franchise’s goodwill and your efforts. In that case, you should carefully review your lease and the franchise agreement’s restraint of trade provisions.
If the franchisor has negotiated the lease, it may contain a clause that will terminate the lease at the end of the franchise or give the franchisor an option to have the lease assigned from you to them. The landlord may also have signed a ‘step-in’ deed. This agreement will give the franchisor the first right of refusal to enter a new lease over the premises.
When bringing on board new franchisees, it is important to negotiate agreements that strike a balance. This factsheet explains how.
What Are the Benefits and Risks of a Lease Agreement?
| Agreement | Advantages | Disadvantages |
| Lease | • the franchisee may have more involvement in the lease negotiation process to get a better deal; • during COVID, franchisees have been more involved in the rent reduction negotiation process; and • the franchisee may feel more independent from the franchisor. | • the lease is an additional obligation on top of the franchise agreement; • breach of the lease may also be a breach of the franchise agreement; • the franchisee needs to manage the additional relationship with landlord; • if there are issues with the premises and the franchisee needs to move, this may have broader implications for the franchise agreement; and • if the franchise business fails, there will be additional costs for the franchisee. |
| License | • the franchisor has control of the premises; • the franchisee only needs to continue to manage their relationship with the franchisor; and • liability for payment under the lease can be shared between the franchisee and franchisor, if the franchisor is agreeable. | • if the franchise agreement ends or is terminated, the franchisee will need to relocate; • upon business failure, the franchisor can chase for outstanding rent; • the franchisor may be liable for breaches of the lease committed by the franchisee; and • if the franchisee defaults and stops paying rent, the franchisor will also be in default. |
Key Takeaways
If you are considering a premise-based franchise, it’s important to note that you will likely need to sign a lease or licence agreement. These agreements come with specific obligations that you must understand. As with any business decision, you can overstate the value of doing your own research. This will give you a full understanding of your leasing options, empowering you to make the best decisions for your franchise.
If you have any questions surrounding the legal requirements and implications of franchise or management agreements, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A lease gives franchisees exclusive rights to occupy a property, while a license provides non-exclusive rights to use a space with less control.
Look for hidden costs, unfavourable terms and compliance obligations. Legal advice can help avoid risks.
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