Franchisor as Tenant
Where a franchise system involves use of fixed premises, Franchisors will usually enter into a head lease with the Landlord subject to conditions allowing the Franchisor to offer a sub-lease or licence to occupy to their Franchisees.
- allows the Franchisor to retain control of the site in the event of default by the Franchisee;
- does expose the Franchisor to liability if the Franchisee defaults – the Franchisor would then remain liable to the Landlord for the rent and other obligations;
- would normally involve an arrangement between the Franchisor and Franchisee (as per the Franchise Agreement and other ancillary documents) whereby the Franchisee provides the bank guarantee/security deposit, takes out relevant insurances, is required to meet rent, outgoings and other obligations under the Lease.
Where the fixed premises are retail in nature, the disclosure regime under the Retail Shop Leases Act 1994 (Qld) must also be complied with (in respect of premises in Queensland).
Franchisee as Tenant
In this case:
- if the Franchisee were to default under the Lease, the Franchisee would be directly liable to the Landlord for rent and the other obligations under the Lease;
- the Franchisee would directly provide the security bond/bank guarantee to the Landlord and take out relevant insurances;
- the rent, outgoings and other obligations under the Lease are the sole responsibility of the Franchisee;
- make good obligations would also fall solely to the Franchisee.
The trade off for enabling the Franchisee to directly enter into the Lease with the Landlord is the Franchisor loses control of the site.
A way to get around this is for Franchisor to negotiate “step in” clauses with the Landlord.
In the event the Franchisee’s lease is terminated, the Franchisor has the option to “step in” to the premises and either continue the franchised business or grant a licence to use the premises to another Franchisee.
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