The Franchise Council of Australia’s view on retail leasing.
The need to ensure retail leasing is both balanced and fair is paramount for franchising and the sector’s peak body is taking steps to bring this about.
There are an estimated 79,000 franchise business units operating in Australia, representing a diverse range of industries, but whether a quick service restaurant (QSR), travel agency, pharmacy, sports store or a myriad other businesses, many of these franchised businesses have bricks and mortar retail outlets.
This makes the issues of site selection and retail leasing important for the franchisors and franchisees alike.
Good site selection will contribute to the profitability of a franchisee's business, delivering strong foot traffic in addition to customers who may be attracted to the business through marketing and advertising campaigns. Conversely, poor site selection can reduce the viability of a franchisee's business, with issues such as poor visibility or poor access limiting sales potential.
Tied to this is the retail lease. A prominent retail site in a good location will likely command a commensurate rental outlay, and this is an expense a franchisee must factor into the cost of doing business.
So, in addition to the franchise agreement, a franchisee will likely also sign a separate retail lease agreement with a landlord.
While the Franchising Code of Conduct regulates the relationship between franchisor and franchisee, and in doing so provides protections to franchisees to address any power imbalance between these parties, there have not historically been equivalent protections enacted in regard to landlords and tenants that are parties to retail leases.
Indeed, where franchising is regulated by a mandatory Code that applies nationally, retail leasing legislation differs from state to state, and so too do the requirements imposed on landlords in their dealings with retail tenants.
As the peak body for the franchising sector, the Franchise Council of Australia (FCA), has been actively engaging to ensure franchised businesses who are required to enter into retail leasing agreements are doing so in a fair and equal marketplace.
In recent times, the FCA has worked in conjunction with our industry partners, the Australian Retailers Association ( ARA) and the Pharmacy Guild, to engage with State Ministers responsible for Small Business, and the State Small Business Commissions around the issue of retail leasing in regard to the review of Retail Leasing legislation in both South Australia and New South Wales. The FCA is also represented in a review of Retail Leasing legislation that is currently underway in Victoria.
In addition, a Retail Code of Industry Practice – The Reporting of Sales and Occupancy Costs (the Code) has been developed and signed by the ARA, Pharmacy Guild and the FCA in response to the Retail Leasing Act amendments in NSW. At the time of this publication, the Code not been signed by the Shopping Centre Council of Australia on behalf of its members.
This Code aims to provide retailers with greater transparency when negotiating lease deals, and to put them on a level playing field with landlords, by addressing some of the information asymmetry and ensuring tenants can make more informed decisions
This is of particular importance in the context of franchising, where there is a marked inequality of bargaining power between landlords in major shopping centres and franchising tenants, the vast majority of whom are individual small businesses.
These tensions have recently boiled over as QSR franchise SUMOSALAD has sought to force a shopping centre landlord to the negotiating table and protect the financial interests of some of its franchisees by putting two of its companies, which hold leases of a number SUMOSALAD franchise units in shopping centres, into administration.
While this case study highlights the potential for a franchisor to step in on behalf of franchisees in a defined set of circumstances, it also underlines the importance of redressing the intrinsic power imbalance between shopping centre landlords and franchisee tenants.
The FCA will continue working with the ARA and the Pharmacy Guild to e nsure the implementation of the Reporting of Sales and Occupancy Costs code, the review of the Casual Mall Licensing Code and to reform state-based retail leasing legislation to reduce red tape and make retail leasing easier and fairer for the franchising sector.