IT’S ALL IN THE NAME

Inside Franchise Business - - Contents - CORINNE ATTARD

The pros and cons of leas­ing and sub­leas­ing.

It pays to know the pros and cons of leas­ing and sub­leas­ing be­fore you

sign a rental agree­ment for your fran­chise out­let.

If you are look­ing to buy a fran­chised busi­ness that can be run from any premises other than your home, you will prob­a­bly need a lease. For re­tail, busi­nesses lo­ca­tion is crit­i­cal, and it is likely your fran­chisor will con­trol the ne­go­ti­a­tion process and re­quire that the lease be ei­ther in its name with a sub­lease or li­cence granted to you, or al­low the lease to be in your name but with con­di­tions at­tached.

There are pros and cons for ei­ther of these re­tail lease struc­tures for you as the fran­chisee and ac­tual oc­cu­pant of the premises.

OP­TION 1 – HEAD LEASE IN FRAN­CHISOR’S NAME

The lease may be in the fran­chisor’s name ei­ther be­cause the fran­chisor wants ul­ti­mate con­trol over the site, or be­cause the land­lord has in­sisted on it. Fran­chisors can usu­ally ne­go­ti­ate bet­ter lease terms with land­lords than can in­di­vid­ual fran­chisees, so this is of­ten a key ad­van­tage.

You can also ex­pect the fran­chisor to ne­go­ti­ate the lease di­rectly with the land­lord as they have the ex­pe­ri­ence to un­der­stand a com­mer­cial deal that will be sus­tain­able for the busi­ness. If the lease has not been fi­nalised, how­ever, you should ask to see any of­fer and de­ter­mine if there are any terms you wish to ne­go­ti­ate or want the fran­chisor to ne­go­ti­ate with the land­lord.

If the fran­chisor holds the head lease it will need to grant you a sub­lease or a li­cence to oc­cupy. You should check that the lease al­lows the fran­chisor to do this, oth­er­wise the land­lord may in­sist on a for­mal ap­pli­ca­tion for ap­proval of you as sub­tenant/li­censee (which means fur­ther costs).

In most cases there is no real ad­van­tage to a sub­lease over a li­cence to oc­cupy. A sub­lease is a more for­mal doc­u­ment that in most states and ter­ri­to­ries re­quires reg­is­tra­tion on the ti­tle, which means ex­tra costs. If the fran­chisee changes, then the sub­lease must be sur­ren­dered or trans­ferred, and in­cur­ring more costs, which the fran­chisor will usu­ally pass on to you. This is why a li­cence to oc­cupy is gen­er­ally favoured.

In ei­ther case, it is usual for the fran­chisor to sim­ply pass on its ten­ant obli­ga­tions to you as the li­censee.

If a land­lord’s dis­clo­sure state­ment is is­sued, you should also re­ceive this. You may also need to pro­vide a ten­ant’s dis­clo­sure state­ment or cer­tifi­cates de­tail­ing any rep­re­sen­ta­tions about the premises you re­lied on, or whether you took le­gal ad­vice on the terms.

This is be­cause un­der the re­tail leas­ing laws in most states, a li­cence is treated the same as a lease: you have the same le­gal rights against your fran­chisor as you do against your land­lord. Im­por­tantly, this does not ap­ply in all states so you need to ob­tain ad­vice on this.

Even though you are not the ten­ant named in the lease you may still be named as per­sonal guar­an­tor, and you are also usu­ally re­quired to pro­vide the bank guar­an­tee or se­cu­rity de­posit to the land­lord as well as the in­surance cer­tifi­cates. Whether or not you have guar­an­teed the lease to the land­lord, you are still li­able to the fran­chisor if you de­fault in rental pay­ments.

A dis­ad­van­tage with the li­cence or sub­lease ar­range­ment is that you have no for­mal right to deal di­rectly with the land­lord about the lease or mat­ters con­cern­ing your ten­ancy, even if you have pro­vided a per­sonal guar­an­tee and a bank guar­an­tee. It is up to the land­lord to ne­go­ti­ate with the land­lord.

If, for ex­am­ple, the fran­chisor does not prop­erly ex­er­cise an op­tion or right to re­new the lease term within the time re­quired, or does not ne­go­ti­ate the lease re­newal, you may be left with­out a lease and there­fore with­out a shop.

An­other prob­lem will be that should the lease end for any rea­son (which may be be­yond your con­trol), your right to use the premises also comes to an end. This is a con­cern if the fran­chisor goes into ad­min­is­tra­tion or liq­ui­da­tion. The lease may be ter­mi­nated by the liq­uida­tor and you will have no fur­ther occupancy rights. In that sit­u­a­tion you will need to ne­go­ti­ate di­rectly with the land­lord for a new lease in your own name if you wish to stay on.

OP­TION 2 - LEASE IN FRAN­CHISEE’S NAME

The fran­chisor may not wish to take on the lease in their own name. This may be its gen­eral pol­icy or it may vary from site to site de­pend­ing on the mer­its of the lo­ca­tion or land­lord re­quire­ments. If the fran­chisee is the ten­ant, then the fran­chisee has the ul­ti­mate re­spon­si­bil­ity to pay the rent to the land­lord and meet all obli­ga­tions.

If there is a de­fault, the land­lord will sue you as the ten­ant and not the fran­chisor.

With the lease in your name, you can deal with the land­lord di­rectly. You may con­sider this a plus if you are con­fi­dent in do­ing so, but you may be able to ask your fran­chisor for help in any case.

If you are ne­go­ti­at­ing a lease you should ob­tain your own le­gal ad­vice, and you may also wish to en­gage a lease con­sul­tant if your fran­chisor is not able to pro­vide the right com­mer­cial as­sis­tance. If you sell your busi­ness, you will need to ob­tain the land­lord’s con­sent to the trans­fer of the lease to the buyer, as well as the con­sent of the fran­chisor.

In the event of the fran­chise end­ing early, as the holder of the lease you may think you can use the premises for an­other busi­ness, per­haps even chang­ing to a com­pet­ing sys­tem. In most cases, how­ever, there will be re­straints in your fran­chise agree­ment that pre­vent this, and your fran­chisor may also hold “step-in” rights.

These rights may be out­lined in the lease or in a sep­a­rate deed with the land­lord. They al­low a fran­chisor to take over a lease if the fran­chise ends, for ex­am­ple if your fran­chise is ter­mi­nated for de­fault. Al­ter­na­tively, if the f ran­chisor b elieves t he l ease or the site is not favourable, the fran­chisor may de­cide in event of de­fault to sim­ply ter­mi­nate the fran­chise but not to take on the lease. In that case, as the ten­ant you will still have to pay the rent un­til the end of the lease or find a re­place­ment ten­ant or sub­tenant.

What­ever the leas­ing struc­ture, it is im­por­tant to en­sure the fran­chise term and the lease term match, par­tic­u­larly if you hold the lease di­rectly. If the

A dis­ad­van­tage with the li­cence or sub­lease ar­range­ment is that you have no for­mal right to deal di­rectly with the land­lord about the lease or mat­ters con­cern­ing your ten­ancy.

fran­chise ends be­fore the lease you may end up be­ing re­spon­si­ble for the lease but with no right to run a busi­ness on the premises.

If the lease ends be­fore the fran­chise, which can hap­pen in any sit­u­a­tion for a rea­son be­yond the con­trol of the fran­chisee or fran­chisor - such as shop­ping-cen­tre re­de­vel­op­ment or fire - there should be pro­vi­sion in the fran­chise agree­ment for the busi­ness to be re­lo­cated to new premises within a rea­son­able pe­riod.

In both op­tions you can see that it is im­por­tant to ob­tain in­de­pen­dent le­gal ad­vice on what is most suit­able for you, and to de­ter­mine your le­gal rights and re­spon­si­bil­i­ties. As a retailer, the im­por­tance of the lease can­not be over­looked.

Part­ner, Hol­man Webb Lawyers

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