Equipment Lessor Approval for Franchise Sale / Purchase

Buying and selling a franchise is rarely, if ever, a simply task - as there are all too often a multitude of complexities, hurdles and pressures bearing down upon the parties involved.

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

The sale of a franchise that has existing equipment lease arrangements cannot be undertaken without conforming to the requirements imposed by the equipment lessor (leasing company) and set out in the equipment lease agreement, which tends to not only require the prior approval of the equipment lessor, but may also have other contractual requirements set out in the written agreement.

Although the specific requirements for attaining the leasing company's approval to undertake the sale of one's franchise are set out in the equipment lease agreement, there are common requirements and conditions that equipment lessors typically impose to protect their financial interests in the equipment they have leased:

A. Transferring the Equipment Lease (Assignment or Novation)

• Lessor Approval: The existing franchisee (lessee) will need the lessor's formal written consent to transfer or assign the lease to the new buyer. The lessor has a vested interest in the financial stability of the new party assuming the debt.

• Buyer Qualification: The new buyer will typically need to submit a comprehensive application, financial statements, and other documents to the lessor. The lessor will evaluate the buyer's creditworthiness and business experience to ensure they are a suitable replacement to take on the financial obligations.

• Assumption of Obligations: The new buyer (assignee) will have to formally agree to assume all the original franchisee's responsibilities, payments, and terms under the existing lease agreement.

• Assignment/Novation Agreement: Formal legal documentation will be required to execute the transfer, often an Assignment and Assumption of Equipment Lease agreement.

• Payment of Fees: The lessor may charge an administrative fee for processing the assignment and evaluating the new buyer.

B. Paying Out the Equipment Lease

• Lessor Notification: The existing franchisee must notify the lessor of the plan to pay out the lease.

• Payout Quote: The lessor will provide a payout amount or buyout figure, which includes the remaining principal, interest, and any applicable early termination fees as stipulated in the original lease agreement.

• Removal of Encumbrance: Once the full payout is received, the lessor is required to remove any security interest (often recorded via a PPSR filing) they hold on the equipment, effectively giving clear ownership to the seller or buyer.

Attempting to sell one's franchise without first obtaining the equipment lessor's approval carries significant dangers, primarily because it constitutes a change of control under most equipment lease agreement. Among the major risks and consequences of attempting to sell a franchise without the leasing company's prior approval:

• Default and Immediate Lease Termination

  • Breach of Contract: Selling the business and transferring possession of the leased equipment without permission constitutes a default under the equipment lease.

  • Acceleration of Payments: The lessor can declare the entire remaining balance of the lease immediately due and payable. This can be a substantial, unexpected financial burden.

  • Repossession: The lessor has the right to repossess the equipment, as they retain ownership. This could immediately shut down the franchise operations or force the buyer to purchase replacement equipment, leading to significant disruption and cost.

• Continuing Financial Liability

  • Guarantor Status: Even if the buyer assumes the payments, you, as the original lessee and potentially a personal guarantor of the lease, will likely remain primarily liable for the lease payments. If the buyer defaults, the lessor will pursue you for all outstanding debt, fees, and collection costs.

  • Damage to Credit: A default on the lease will negatively impact your personal and business credit ratings, potentially harming future borrowing capacity.

• Legal Disputes and Liability to the Buyer

  • Breach of Sale Contract: The buyer may argue that you breached the franchise sale agreement because you failed to deliver "clear title" to the equipment or failed to properly assign the lease.

  • Rescission or Damages: The buyer could sue you to rescind the sale (undo the deal) or for substantial damages, including the cost of replacing the repossessed equipment, lost profits due to business interruption, and legal fees.

  • Undisclosed Encumbrance: The equipment lessor likely has a security interest filed (such as a registration on a Personal Property Securities Registry), indicating they have a claim on the equipment. Selling it without addressing this is equivalent to selling property with an undisclosed lien, which is a major liability.

• Difficulty in Closing the Franchise Sale

  • Funding Issues: A sophisticated buyer or their lender will conduct due diligence and discover the unapproved lease assignment and lessor's security interest, which will be a red flag. This can cause the sale to be significantly delayed or fall apart completely because the assets cannot be legally transferred.

The approval of the equipment leasing company is but one of the parties from whom permission is typically required when selling a franchise, with the seller also needing to engage with the franchisor, the landlord, the bank/financing company, suppliers, and regulators.

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.