Should the Franchisor or the Franchisee hold the Lease?

Careful consideration needs to be given to whether the franchisor will hold the Lease of the business premises or require the franchisee to hold the Lease in its own name. There are pros and cons to both options however if the franchisor’s primary concern is protecting the goodwill of the franchise, an important part of which is often tied to the location of the business, we recommend franchisors hold the Lease and give the franchisee a licence or occupancy rights under the Franchise Agreement.

The risk to the franchisor of holding the Lease is that the franchisor is primarily liable for payment of rent and outgoings. If the franchisee abandons the business premises and/or stops paying rent and outgoings the Landlord will require the franchisor to pay, regardless of any condition in the Franchise Agreement requiring the franchisee to pay these amounts on the franchisor’s behalf. The franchisor will then have to pursue the franchisee for reimbursement.

The benefit of holding the Lease is that regardless of what happens to the franchisee the franchisor retains control of the site and the brand. If the franchisee abandons the business and the agreement is terminated, it is much easier to take possession of the site if the franchisor holds the Lease. This enables the franchisor to ensure that any goodwill associated with the location is maintained whether this means the franchisor operates the business or replaces the franchisee.

If the franchisor requires the franchisee to hold the Lease in its name, regardless of any rights under the Franchise Agreement in respect of the premises, it is far more difficult to maintain control of the site or to take possession of the business in the event that the Agreement is terminated.