A lease or a licence?
Most franchises operate from retail premises and the franchisor will often take a superior lease interest and then grant the franchisee a lease or licence from it. This enables the franchisor to have some additional control over the franchisee and is also more attractive to the ultimate landlord as they get the security of having the stronger covenant of the franchisor as a direct tenant.
A franchisor will often prefer a lease to a licence as the franchisor can expressly exclude the renewal provisions of the Landlord and Tenant Act 1954 meaning that the franchisee does not have a statutory right to renew their lease when it expires.
A true licence does not need to exclude the 1954 Act and is often a shorter and simpler document. However, the issue with a licence is that it cannot grant exclusive possession of the premises to the franchisee – if it does then the Court will treat the document as a lease. As a result, an excluded lease is often preferred by landlords to ensure that they do not inadvertently grant a lease with a right to renew instead of a licence.
Can I assign my lease or grant a lease to another occupier?
This will depend on what the franchise lease says. The franchisor may want to restrict the franchisee from having the ability to pass on its lease or grant an underlease to enable them to protect the brand.
If assignment is allowed then it is likely to be on the basis of some strict requirements such as the assignee being an existing franchisee pre-approved by the franchisor or the assignee being an entity in the sole control of the outgoing franchisee.
Frequently, a franchisee will be prevented from granting an underlease but if allowed it is likely to have to be on similar terms to the franchise lease and require the undertenant to comply with the franchise agreement and other franchisor conditions.
My franchisor requires me to do some works to the property, is this normal?
This is usual. The franchise agreement should be read carefully to see what works the franchisor can require you to make. Often these will include works in relation to rebranding of the chain or installing new equipment or technology at the premises. Usually the cost of these works will have to be covered by the franchisee.
The franchise lease is also likely to include standard provisions requiring the franchisee to repair, maintain and decorate the premises throughout the term.
What about service charge and other outgoings?
Again the franchisor is likely to expect the franchisee to cover any service charge and outgoings at the premises in much the same way as you would expect in a standard lease arrangement. Usually the franchisor will insure the property (or if there is a superior landlord then they will) and the cost will be charged back to the franchisee. Any service charge costs will also filter down for the franchisee to cover any day to day payments for utilities. Other outgoings will also be the franchisee’s responsibility.
Will my rent be reviewed?
If your franchise lease is for a term over 5 years then it is likely that there will be some sort of potential uplift on your rent during the term. However, sometimes franchisors prefer to agree stepped rents up front or will include a fixed basic rent with a top up rent based on turnover. This means that, if you do well you pay the franchisor more.
What happens when my lease expires or my franchise agreement is terminated?
Franchisors will usually insist that the franchisee can only use the brand where their lease and franchise agreement are still in place. As such if the franchise lease expires or is terminated then often the franchise agreement will automatically end too and if the franchise agreement is terminated then the lease may be ended or there will be an ability for the franchisor to serve notice to terminate the arrangement.
The franchise agreement will set out what happens upon termination and this will normally include the ability for the franchisor to take back brand materials and equipment and may include restrictions on the franchisee entering into competing businesses. In certain circumstances there may also be early termination penalties or other cost implications that the franchisor will require the franchisee to pay although these will often depend on how or why the arrangement has come to an end.
Further help needed?
We have a great deal of experience in franchising and all aspects of real estate law and if you have any questions we have not covered or you wish to discuss any of these issues in more detail with us we would be happy to speak with you.