Franchisor as Tenant (with Franchisee Subleasing)

Leasing the business premises (real estate) can make or break a franchisee, requiring adequate legal oversight thereof.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Whereas the typical leasing arrangement is for the franchisee to lease the subject property from the property owner (landlord); on occasion, the franchisor will lease the property from the property owner and thereafter proceed to sublease that same property to the franchisee. Under these circumstances, and unlike the typical arrangement of the franchisee leasing directly from the property owner, having the franchisor enter into the lease with the property owner can be advantageous to the franchisee, given that a franchisor with a superior covenant should be in a better position than the franchisee to bargain for concessions and favourable lease terms with the property owner, such as lower rents, renewal/extension options and exclusivity rights.

If the franchisor enters into a lease with the property owner, the common practice is for the franchisor to sublease the premises to its franchisee (rather than assigning its leasehold interest) such that the franchisor continues to have privity of estate and control over the premises upon termination of the franchise agreement. If the parties proceed by way of sublease, the landlord-tenant relationship will be preserved between the head landlord and the franchisor, and a new landlord/tenant relationship will be created between the franchisor, as sublessor, and the franchisee, as sublessee; which should be further supported by either a consent to sublease or a tri party sublease agreement.

Among the franchisee's considerations when subleasing from their franchisor, particular attention should be placed on the following aspects:

• Property Owner (Head Landlord) Consent: Ensure that the property owner's consent is obtained prior to executing the sublease, or is conditional upon consent being obtained.

• Location: Word to the wise, where possible, avoid signing the franchise agreement until the location for your franchise has been conclusively determined and approved. If you must sign before then, it is essential that you include requirements, conditions and timing for site selection, together with the refund of your initial franchise fees if your cannot mutually agree to a particular site within a specified timeframe.

• Term: The franchise agreement and sublease should be co-terminus with identical renewal timelines that are triggered by the same method.

• Rent: The franchisee should look to gain the advantage of the franchisor’s ability to negotiate a favourable (lower) rental rate. Be mindful of any rent spread (the franchisee paying a higher base rent than what the franchisor is paying under the head lease).

• Renewal/Extension: The sublease should include a covenant from the franchisor to exercise its corresponding renewal/extension rights in the head lease when the franchisee exercises its options under the sublease and the franchise agreement (and where possible, the franchisee should seek to attain all indemnity for losses suffered or a right to relocate, in the event the franchisor fails to renew/extend).

• Compliance with the Head Lease: If the sublease requires the franchisee to be bound by and perform all obligations of the franchisor under the head lease, be sure to obtain a copy of the head lease agreement and review it carefully.

• Cross-Default: If possible, avoid a cross-default clause.

• Covenants that should be sought: The franchisee should seek the following covenants from the franchisor:

  • peaceful and quiet enjoyment of the leased premises for the term of the sublease;

  • to comply with the franchisor’s obligations under the sublease, the head lease and the franchise agreement; and

  • to take all necessary action to enforce the covenants and obligations of the head landlord under the head lease for the benefit of the franchisee.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

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Franchisor as Tenant (with Franchisee subleasing) - Whereas the typical leasing arrangement is for the franchisee to lease the subject property from the property owner (landlord); on occasion, the franchisor will lease the property from the property owner and thereafter proceed to sublease that same property to the franchisee. As opposed to the franchisee leasing directly from the property owner, having the franchisor enter into the lease with the property owner can be advantageous to the franchisee. Read more.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.