Leasing arrangements in franchising – the key things to know

In franchises which operate from retail premises, such as most restaurants and retail franchises, the franchisor will usually either select or have a right of veto over the premises.  The way in which the leasing arrangements are structured can have a significant impact on a franchisee and its business.

How does it work?

Leasing arrangements are generally structured one of two ways:

  1. The franchisee holds the lease.  In this case, you negotiate the lease directly with the Landlord, and will be responsible to the Landlord for paying the rent and complying with the other terms of the lease.Importantly, your obligations to the Landlord operate independently to the Franchise Agreement.  This means that you must still pay the rent to the Landlord even if the franchise has come to an end (for whatever reason).  You must make sure that the term of your Franchise Agreement coincides with the term of the lease so that they both finish at the same time, and that the length of any options to renew that you have under the lease also match the options you have under the Franchise Agreement.
  2. Your franchisor holds the lease.  The Franchisor may hold the lease and grant you a license to occupy the premises.  The Franchisor deals directly with the landlord and enters into the lease.  The franchisor is then primarily liable to the Landlord to pay the rent and comply with the lease.Under the licence to occupy the franchisor gives you permission to you to use the premises to operate the business and passes on to you all of its obligations under the lease.  You have the use of the shop but also the obligation to comply with the lease as if you were named as the tenant.

What are the risks?

It is quite common now for Franchisors to hold the lease and grant a licence to occupy but as a franchisee you must be aware of the following:

  1. You will usually be asked to personally guarantee the lease (even though the Franchisor holds the lease);
  2. You will usually be asked to provide a bank guarantee or security deposit to the Landlord to secure your Franchisor’s obligations under the lease;
  3. You have no right to deal directly with the Landlord about the lease, even if you have provided a personal guarantee and a bank guarantee/security deposit;
  4. If the lease ends for any reason (even if it is not your fault), your right to use the premises also comes to an end.

What you need to do

Firstly, understand that these arrangements are common in franchising and can benefit the franchisee.  For example, many Franchisors are experienced in negotiating leases and sometimes can secure better terms (including better base rent) because of that experience.  Also, many large shopping centres now prefer dealing with franchise chains and will not grant leases to individual franchisees.

Second, whatever way the leasing arrangements are structured, you should always obtain legal and financial advice so that you understand your rights, obligations and financial commitments.

Finally, always read and obtain advice regarding the terms of the lease.

How we can help?

We regularly receive referrals to help clients in relation to retail and commercial leasing and franchising matters. Clients are referred to us because of our experience in the franchising industry and our commercial and pragmatic approach to helping our clients.

Contact Peter McLaughlin on 07 3223 6100 or email PeterM@redchip.com.au to discuss how we can help you.

This article is a summary of a chapter from “Buying your Franchise”, book 1 in the ‘Shaking the Profits from Franchising’ book series. Please contact us if you would like to purchase a copy.

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