IT’S ALL IN THE NAME
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.