Site Based Franchising: How do Lease or Licence Arrangements work?

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• Site Based Franchising
• How does it work?
• Costs
• Conclusion

Quite often when a franchisee is buying a franchise they require a lease or licence agreement to occupy premises to conduct that business (Premises) – this is known as “Site Based Franchising”.

Site Based Franchising

Site-based franchises rely on the following agreements:

• The Franchise Agreement with the Franchisor; and
• A Lease or Licence Agreement with the Landlord and/ or Franchisor.

Franchisees sometimes overlook the leasing arrangements when assessing the franchise opportunity. Once the Franchisee signs the franchise agreement, they may realise that they require a leasing or licence arrangement for premises.

How does it work?

The leasing/ licence arrangements typically work in two ways:

1.    The Franchisee holds a lease directly with the landlord for the Premises, which means that the Franchisee is directly responsible to the Landlord for the payment of rent and compliance with all terms of the Lease.

Note the following key takeaway points:

• The Lease with the Landlord is in addition to the obligations the Franchisee has to the franchisor under the franchise agreement;
• The Franchise Agreement will often contain a provision to ensure the Franchisee complies with all terms of the Lease. If this does not occur, the Lessee may not only be in breach of the Lease but the Franchise Agreement also; and
• The franchise agreement and lease must be compatible so that the lease does not expire before the franchise agreement leaving the Franchisee with no Premises from which to conduct their business.

2.    The franchisor holds the lease and grants the franchisee a licence to occupy the premises.

Note the following takeaway points:

• The franchisor and the landlord enter into the lease together, meaning the Franchisee may not have any say as to the provisions of the lease and their fairness or otherwise to the franchisee;
• Notwithstanding the franchisor’s control of the lease and premises, the Franchisee will inherit all leasing obligation, including rent, under the licence agreement;
• The purpose of the licence agreement is to put the Franchisee in the shoes of the Franchisor, insofar as obligations under the lease are concerned. These responsibilities include the payment of any bank guarantee or security deposit and obtaining insurance; and
• If your franchise agreement comes to an end, the right to occupy the Premises will be lost.

Costs

It is common for prospective franchisees to pay the Lessor’s legal fees to prepare and enter into a lease, licence and franchise agreement.

Further, the Franchisee must pay rent on the lease or licenced Premises throughout the course of the Franchise Agreement and Lease/ Licence Agreement.

Note that hidden costs, such as Fitout of the Premises, may also be required and should be thoroughly investigated before any agreements are signed. 

Conclusion

Given entering into a franchise agreement and Premises Lease/ Licence Agreement is such a tremendous financial commitment, it is imperative you obtain legal advice.

Our LegalVision franchise lawyers can help you understand the arrangement for Site Based Franchising set out in the Franchise Agreement and Lease / Licence Agreement.

Please call us on 1300 544 755 for assistance.