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Leasing arrangements in franchising – the key things to know

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Site-based franchise businesses hinge on two key agreements – franchise agreement with the franchisor and the lease of premises with the landlord. The leasing arrangements are sometimes overlooked when franchisees assess the franchise opportunity. However the way in which the leasing arrangements are structured can have a significant impact on you and your business.

How does it work?

The leasing arrangements typically work in one of two ways:

1. You hold the lease directly with the landlord, and are responsible to the landlord for paying the rent and complying with the other terms of the lease. Be aware however that your obligations to the landlord operate independently to the franchise agreement, meaning you will stay bound by the lease even if the franchise has come to an end. 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.
2. The franchisor holds the lease and grants you a license to occupy the premises. The franchisor deals directly with the landlord and enters into the lease. The franchisor is in control of the relationship with the landlord and of the premises although the obligations to pay rent and comply with the lease terms will be passed on to you under the license agreement.

What are the risks?

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

(a) you may be required to personally guarantee the lease (even though the franchisor holds the lease);
(b) you may be required to provide a bank guarantee or security deposit to the landlord to secure your franchisor’s obligations under the lease;
(c) 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;
(d) 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. 

Article was written by Peter McLaughlin.  To contact Peter email [email protected] or call (07) 3852 5055.