I Am a Franchisor. What Should I Know When Subleasing to Franchisees?

Summarise with: ChatGPT Perplexity Microsoft Copilot

---

Table of Contents

• What is the Difference Between a Licence and a Sub-Lease?
• Subleasing the Premises to the Franchisee
• Have Your Landlord Given Their Approval?
• Can the Franchisee Pay the Rent on Time and in Full?
• Check the Permitted Use in the Head Lease
• Check the Term of the Head Lease
• Is the Make Good Obligation Clear to the Franchisee?
• Disclosure Requirements Under the Code
• Key Takeaways
• Frequently Asked Questions

For many businesses, including franchises, location is critical. If you are a franchisor that owns building premises, it might be beneficial for the franchisee to lease your premises rather than a third party owning them. Alternatively, there could be incidents where you enter into a lease as a franchisor and sublease the premises to the franchisee. There are pros and cons to each way. This article will outline your obligations and rights as a franchisor when subleasing to franchisees.   

What is the Difference Between a Licence and a Sub-Lease?

Generally, when you sublease the premises to a franchisee, it gives the franchisee greater rights and autonomy to occupy. For example, a licence allows the franchisee to use the premises for a specified purpose, whereas a sublease creates a relationship between the franchisee and the landlord and gives them the right to possess the premises exclusively. Furthermore, the sublease is a more formal document that will often require registration on the title in most states and territories. 

Subleasing the Premises to the Franchisee

Here, the franchisor will hold the lease (head lease), while the franchisee becomes the sub-lessee accountable to you as the head lessor. The terms and conditions of the head lease are usually the same as the sublease. Therefore, most commercial terms, such as rent, stay the same. 

A few things to note when subleasing premises to a franchisee include:

• ensure you have the landlord’s approval before subleasing the premises to franchisees. Failure to obtain such approval can be a breach of the lease and may result in termination; 
• as a sublessee, the franchisee has no contractual obligation to the landlord as its an agreement between you and the franchisee; 
• usually, a landlord will require any proposed sublease to be provided to them for approval before it can be entered into; and 
• always draft a written sublease between you and the franchisee. That is, you should rely on something other than informal or handshake agreements. 

Have Your Landlord Given Their Approval?

You should note that most leases contain a subleasing provision, which sets out all the requirements you need to meet before you can sublease the premises to your franchisees. One of which is getting prior written approval from the landlord. Without this approval, you will be breaching your lease if you sublease the premises to your franchisees.

Can the Franchisee Pay the Rent on Time and in Full?

It is also essential to consider whether it is worth subleasing the premises to your franchisees. If the franchisee is unable to pay the rent and defaults under the sublease, you will be:

• liable to pay the whole of the rent under the head lease; and
• held responsible for the failure to pay by the landlord. 

Check the Permitted Use in the Head Lease

It is also vital to ensure that the permitted use is properly agreed upon before subleasing the premises. The franchisee must run a business consistent with the permitted use under the head lease. Although unlikely for franchised businesses who essentially run the same businesses, there often are cases where a subtenant needs to comply with the permitted use, which can cause some headaches to you as a sublessor.

Check the Term of the Head Lease

As a rule of thumb, the term of the sublease should always be one day less than the expiry date of the head lease. If your lease and the franchisee’s sublease expire on the same day, this is an assignment of the lease. Indeed, this will create problems as you technically do not have any consent to assign the lease. 

Is the Make Good Obligation Clear to the Franchisee?

At the end of every lease, the tenant must make good the property as per the lease obligations. This responsibility only applies to the franchisee if you expressly state their make-good obligations in the sublease. You may not have direct control over the condition of the property that the franchisee is subletting from you. So when drafting a sublease, it is best to insert a clause stating that the franchisee is responsible for all make-good works under the head lease. 

Disclosure Requirements Under the Code

Under the Franchising Code of Conduct (Code), you must comply with specific lease disclosure requirements if you or your associate enter a premises lease and propose to sublease the premises to the franchisee. If so, you must provide the franchisee with a copy of the head lease. Additionally, ensure you provide this simultaneously as the disclosure document. The mandatory 14-day disclosure period will not officially commence if you do not.

Franchisor Toolkit: How to Franchise Successfully

Franchising your business? This free guide will guide you through key strategies, legal essentials, and tips for successful growth.

Download Now

Key Takeaways

If you wish to sublease your rights to a franchisee, there are quite a few things you need to consider. First, you need to make sure that you have written consent from the landlord. You must also ensure that the commercial terms are the same as the head lease so your obligations under the head lease are still met. 

If you need help understanding your rights when subleasing the premise to a franchisee, our experienced franchise and leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions