Should the Franchisor hold the Head-Lease to Retail Premises?

There is much debate & divergence of opinion between franchise lawyers and consultants, as to whether a franchisor should hold the lease to their franchisees premises.

For retail franchisors finding suitable sites is becoming more difficult.  Securing a site in a shopping strip can mean shutting out a competitor from a strategic location. .

Should a franchisor itself or via its related entity hold the Lease?
It is often an issue not properly considered by a franchisor and their advisors when considering the business model.  It is not until the franchisee defaults and the franchisor tries to take possession of the business to maintain its brand and presence that the penny drops.

In some circumstances, the determining factor will be the landlord.  Shopping Centres such as Westfield, Gandel, Lend Lease and the like require that franchisors hold the lease.  They do not want to deal with individual franchisees. 

So what are the considerations?
The benefits to a franchisor in holding the lease is the ability to maintain their presence in a centre or shopping strip if a franchisee defaults. 

The franchisor is also in the best position to negotiate favourable terms, possibly rent free concessions and fit out contributions for their franchisee.  The franchisors leverage with shopping centres also increases as their presence and brand develops.

Another advantage is that the franchisor will not have to deal with the franchisees bank (which may hold a mortgage over the lease and franchisee’s company assets) which means one less party for the franchisor to deal with on a default by the franchisee. 

Franchisor’s liability
By holding the lease the franchisor is primarily liable for the rent and outgoings, if the franchisee abandons the business, or stops payment of rent.

The landlord will require the franchisor to meet those obligations regardless of any condition in the Franchise Agreement which might give the franchisor a right of indemnity as against the franchisee.

If a franchisee defaults or abandons the business, they do so quickly and there is little time for the franchisor to act.

Where the franchisor does not hold the lease, they may have difficulty gaining access to the premises.  Exercising their rights under a Power of Attorney provision in the Franchise Agreement and dealing with the landlord or their agent can be fraught with delay negotiating with landlords, agents and lawyers while the business remains closed. 

Where the franchisor holds the lease and the franchisee abandons, the franchisor can, without delay, step in, take control of the site and make arrangements to either manage and/or conduct the business.

Case note
The franchisor was advised by shopping centre management that the franchisor did not attend to open the store during usual trading hours.  This constituted a breach of the lease by the franchisor where the franchisor holds the lease.

The franchisee was thought to have abandoned the business.  The franchisee operated under a license rights to occupy the premises.  The franchisor gained immediate access to the premises with the assistance of shopping centre management and security.  The business then continued to remain open with little or no damage to the good will and reputation of the franchisor.

The franchisor could then negotiate with the franchisee (or franchisees bank) to payout the depreciated value of the fixtures, fittings and stock less any default costs and monies owing o the franchisor.


Summary
Each franchise business model needs to be carefully assessed, however this issue should not be overlooked.  On balance, we recommend a franchisor hold the lease as we have found from experience it more effectively protects their site and brand.

It is vital to obtain specialist legal franchise advice.