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Creative And Strategic Legal Guidance

Two-Part Series: Leases from the Franchisor’s Perspective – Part 2

On Behalf of | Aug 22, 2018 | Firm News

Details on the Itemized List 

In Part 1 of this blog, we listed the interests and concerns Franchisors have in connection with their Franchisees leases. This blog provides in more detail some of the points made in Part 1.

1. Paramount to brand awareness and marketing of franchised units is proper signage on the Premises. Franchisors often have sign specifications for exterior and interior signage for which the Franchisees will need to obtain the Landlord’s consent.

2. Franchisors can include in the Lease Rider a provision that prohibits the Landlord from renting space to a competing business within the same shopping center as the Franchisee’s unit, or even within a certain radius from the Premises. The definition of “competing business” can be broad or narrow, but the idea is to protect the Franchisee from another similar business within the same shopping center or within the defined radius.

3. In order to help prevent “break-away franchisees,” a provision can be included in the Lease Rider that prohibits the Premises being used for anything other than the Franchisor’s branded business. That would make it difficult for the Franchisee to terminate its relationship with the Franchisor and remain in a similar business at the same location. This provision would bolster the covenant not to compete in the Franchise Agreement, or for units in states where covenants not to compete are not enforceable, can be another way of preventing unfair competition.

4. Some Landlords require their tenants to furnish sales information to them. Franchisors can require Landlords to furnish the Franchisor copies of any such information, so the Franchisor has an additional source relating to the Franchisees’ sales (particularly if the Franchisee has failed to furnish that information to the Franchisor).

5. The loss of a good franchised location can be very detrimental to the franchise brand. If the Franchisee/Tenants defaults under the Lease, the proper language in the Rider would give Franchisor the right to be notified by the Landlord of such default, and to cure it (thereby keeping the Lease in good standing), or to assume the Lease altogether.

6. See #5 above. The proper language in the Rider would give the Franchisor the right to assume the Lease from the Franchisee.

7. If the Franchisee is misusing the Marks, or if the Lease is terminated, the Franchisor may need to enter the Premises to correct the usage of the Marks, or, in the case of a shuttered business, to remove the Marks so that they are not associated with the closed business.

8. Some Franchisors use a “Collateral Assignment of Lease,” which gives the Franchisor the option, but not the obligation, to assume the lease upon a default by Franchisee of the lease or of the Franchise Agreement. This document is signed by the Franchisee and the Landlord at the time the lease is signed. It protects the Franchisor’s interest in the location not only if the Franchisee defaults under the Lease, but also if the Franchisee is in default under the Franchise Agreement. It can also provide for the Franchisor to be able to name a designee (such as an affiliate or another Franchisee) as the replacement Tenant. It can, in addition, state that upon the Franchisor re-assigning the Lease to another Franchisee, the Franchisor is released from liability under the Lease.

9. A prohibition against amending or terminating the Lease without the Franchisor’s approval protects the Franchisor from the Landlord and Franchisee undoing any of the provisions that were entered into to protect the Franchisor.

NOTE: Not all Landlords readily agree to all of the above provisions suggested. While Landlords are generally in favor of leasing to businesses with a recognized brand, they do not like to have provisions that impose more requirements and restrictions on them than they have with non-franchisee tenants. There is usually a lively negotiation between Landlord and Franchisor (on the Franchisee’s behalf) regarding these points, and the attractiveness and appeal of the physical location may make it difficult for the Franchisor to get all of these provisions into the Rider. But it’s always worth making the effort.