Should the Franchisor or Franchisee hold the Lease of Premises?

Look at any shopping centre in Australia and you will notice that many of the shops across many different shopping centres are the same. We see from this, the huge popularity of franchising in Australia.

The need for retail premises with each of these Franchised retail stores means that decisions need to be made about who controls the premises. Should the owner of the business (Franchisee) take a lease of the premises? This means taking the direct benefit and risk associated with the lease. If the Landlord has a complaint or needs to sue for performance of the lease the first point of contact would be the lessee. If the business owner or Franchisee signs the lease then they are personally and directly responsible to the landlord.

Alternatively, should the Franchisor take the lease, and then give a licence to the franchisee? This means that the Franchisor is in control of the premises. The benefit for the Franchisor is that, if there is a falling out with the Franchisee or, the Franchisee leaves the business, there is no direct impact on the lease, provided that, the Franchisor continues to honour the Franchisors obligations under the lease.

I should point out that generally a Franchisor will ask for an indemnity from the Franchisee in respect of all the obligations of the Franchisor written in the lease. This is done so that the franchisee shares the same risk as the franchisor, regardless of how the premises agreement is structured.

I should also note that it is possible for the Franchisor to take no risk under the lease simply by allowing the franchisee to take the lease directly. The downside for the Franchisor is the loss of control.

So how to make a decision? For the Franchisor the decision should be made on the quality of the premises. If the Franchisor feels that the premises are important to the system, because of location, demographics or competition, then one might expect the Franchisor will want to control those premises by signing the lease directly with the landlord. The Franchisor may feel that these premises should remain part of the system even if the Franchisee defaults. In this situation control is the dominant issue.

From the Franchisee’s point of view, a decision should be made based on the Franchisor’s requirements. If the Franchisor requires indemnities and guarantees and a tight licence agreement then it might be better for the franchisee to ensure that they have direct control of the lease as the risks associated with the lease will all be repeated in the licence. A restraint of trade will mean that the lease is of no benefit once the franchise agreement ends.

So how do you get what you want? This is where your negotiating skill and knowledge of the industry will help.

These are issues in addition to those noted above that need to be examined closely by both Franchisors and Franchisees at an early stage. A franchise agreement is a sale and the best time to negotiate if you are a franchisee is at the time the salesman wants to make that sale – not after you’re on the hook!

If you are a Franchisor your best bet is to ensure that you have a written policy.

Contact us if you wish to set up a franchise systems or purchase a franchised business.