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Franchise lease and licence agreements
As part of most franchise arrangements, the franchisee must have a premises from which to operate the franchised business.
There are two ways in which the premises are provided to a franchisee in a franchise agreement:
- The franchisor leases the premises directly from the lessor and then subleases or licences the premises to the franchisee; or
- The franchisor permits the lessee to enter into the lease agreement – or retail lease contract – directly.
Franchisor’s direct lease
Most franchisors prefer to lease the premises director through the landlord. The reason for this is that it permits the franchisor to exercise a greater degree of control over the premises. It also ensures that the franchisor becomes immediately aware of any default by the franchisee so that the franchisor can step into the shoes of the franchisee and rectify any breach of the lease before it is terminated by the lessor.
Protecting a franchisor’s brand is very important and there is nothing more damaging to a brand than having its franchised retail stores being vacated at a regular rate.
However, a franchisor who enters into a lease directly with a lessor assumes obligations both as lessee and as sublessee or licensor to the franchisee.
Important considerations for leases and franchise licence agreements
There are numerous issues that must be considered when negotiating a franchise lease or franchise licence agreement including:
- Do the lease/licence term and franchise term align?
- Does the lease permit a franchisor to grant a franchise licence agreement to a franchisee? These clauses should be flexible so as to allow a franchisor to do so with a minimum of fuss.
- Does the lease permit a sublease or licence to a franchisee which is not overly onerous on the franchisor?
- Does the permitted use cover all of the activities of the franchise business? Permitted use clauses should be broadly defined so as to ensure that changes to the franchised business to add or delete products or services do not breach the permitted use.
- Do you need an exclusive use clause? For example, if your premises will be in a shopping centre, do you want to try and restrict the lessor from granting another lease to a business that competes with the franchised business?
- What are the fit-out provisions and do they extend to all of the franchise requirements such as the size and prominence of signage?
- What are the make good clauses in the lease and what specifically are you required to do to the premises when the lease comes to an end?
- Does the lease have an option to renew? This is especially important if the franchise agreement contains an option so that the premises are available for both the initial term of the franchise agreement and any option term.
- Franchisees must be sure that a sublease agreement or franchise licence agreement is capable of running for the whole of the term of the franchise agreement. The sublease or licence agreement cannot continue if the head lease, which has been entered into between a franchisor and lessee, has been terminated or has expired.
These are only some of the many considerations that franchisors and franchisees must take into account in relation to a franchise lease or franchise licence agreement.
Lawpoint has experienced franchise lease lawyers
Whether you are an experienced franchisor, or a first-time franchisee, it is very important that your lease, sublease or licence agreements are negotiated and drafted properly so as to protect your interests in the franchised business. A well drafted lease, sublease or licence agreement protects both the interests of the franchisor and the franchisee against the very different interests of a lessor.
Lawpoint’s franchising advice and leasing lawyers can help you avoid making a bad financial decision and signing a franchise lease or franchise licence agreement that does not properly protect you. We have extensive experience across franchising law and property law, so you can rest assured that all of your interests are protected.
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