Landlord 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 operates on leased property cannot be undertaken without conforming to the requirements imposed by the landlord and set out in the commercial lease agreement, which tends to not only require the prior approval of the landlord, but may also the payment of the prescribed assignment fee and the business purchaser entering into either a lease assignment agreement or a new commercial lease agreement.

Although the specific requirements for attaining the landlord's approval to assign the existing lease to a new commercial tenant (the franchise purchaser) are set out in the Commercial Lease Agreement, there are common requirements and conditions that landlords typically impose to protect their interests in the leased property:

A. Review and Consent to Lease Assignment

• The commercial lease will almost certainly contain a clause requiring the current tenant (the selling franchisee) to obtain the landlord's written consent before assigning the lease to the new franchisee (the buyer).

• Many leases state that the landlord's consent cannot be unreasonably withheld, but the burden of proving an unreasonable refusal is typically on the tenant.

• The landlord has a commercial interest in ensuring the new tenant is financially sound and will comply with the lease terms.

B. Evaluation of the New Tenant (The Buyer)

• The landlord will assess the prospective buyer's financial strength and business history to determine their ability to meet the lease obligations. This often involves:

  • Credit reports and financial statements.

  • Background checks and references.

  • Evaluating the buyer's overall business experience and commercial viability.

C. Assignment Fees and Costs

• The lease may stipulate that the tenant must pay the landlord's reasonable costs associated with reviewing the assignment request. This typically covers legal fees for reviewing the documents and administrative costs for processing the transfer.

• Some landlords may attempt to charge an excessive lease assignment fee, which can be a point of negotiation.

D. Original Tenant's Continuing Liability

• In most commercial lease assignments, the original tenant (the seller) remains liable for the lease obligations if the new tenant defaults. The landlord often requires this to maintain financial security.

• The selling franchisee should attempt to negotiate a release from this continuing liability, but it is often difficult to secure.

E. Compliance with Lease Terms

• The landlord will check if the existing tenant (the seller) is in default of any terms of the current lease (e.g., unpaid rent, unapproved alterations, maintenance issues). Any defaults typically must be cured before the assignment is approved.

F. Change of Control Clause

• If the franchisee is a corporation, the lease may contain a "change of control" clause. This provision treats the sale of the franchisee's shares (a change in ownership of the tenant entity) as an assignment of the lease, also requiring the landlord's consent.

G. Franchisor Approval

• While not a direct landlord requirement, the landlord will want confirmation that the franchisor has approved the sale of the franchise, as the new tenant must operate the premises under the brand's system, which requires a new or assigned franchise agreement.

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

• Lease Termination and Eviction: The most severe risk is that the landlord could consider the unauthorized transfer (assignment of the lease) a breach of the lease agreement. This breach may give the landlord the right to terminate the lease and evict the new owner (the buyer), effectively forcing the closure of the franchise location. Since the business's value is tied to its location, losing the lease could make the franchise worthless.

• Seller's Continuing Liability: In many cases, even after assigning a lease, the original tenant (the seller) remains jointly and severally liable for the new tenant's (the buyer's) obligations under the lease, including rent and maintenance. If the landlord terminates the lease or the new owner defaults on payments, the landlord can pursue the original franchisee (the seller) for all unpaid rent and damages.

• Jeopardizing the Sale: The buyer's financing (if any) is often contingent on securing an approved assignment of the lease. Without the landlord's consent, the buyer may be unable to close the transaction. The sale agreement will likely have a clause making the sale conditional on obtaining landlord consent, meaning the deal could collapse.

• Franchisor's Approval Issues: Most franchise agreements also require the franchisor's approval for the sale. The franchisor's approval is often conditional on the franchisee (seller) securing an approved lease assignment. Selling without landlord approval could therefore also put the seller in breach of the Franchise Agreement.

• Legal Costs and Litigation: If the landlord discovers the unapproved transfer, or if the sale falls apart over the lease, the seller may face expensive litigation with both the landlord and the buyer.

The approval of the landlord 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 bank/financing company, equipment lessors, 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.