Tuesday, January 14, 2014

For Franchisor, Franchisee and Landlord: Ways a Franchise Agreement and Commercial Lease May Conflict (Part 2 of 3)

By Barbara I. Berschler




FOR FRANCHISOR, FRANCHISEE AND LANDLORD:
WAYS A FRANCHISE AGREEMENT AND COMMERCIAL LEASE
MAY CONFLICT
Part 2 of 3

From the Franchisor’s Point of View

In my previous blog looking at the troika-like relationship created among a franchisor, franchisee and landlord, I focused on some issues which the franchisee should look out for to avoid being placed in the proverbial “rock and a hard place” between its franchisor and its landlord[BB1]  I now turn my attention to some issues that the franchisor may want to press with the landlord and how the landlord may respond.

FRANCHISOR GOAL IS TO MAINTAIN MAXIMUM FLEXIBILITY:

A major objective of the franchisor is the growth of its franchise system.  Because any new location reflects much effort and expense on the part of the franchisor to expand its presence, it wants to maintain flexibility with respect to the leased premises to keep it in the system once the business has opened without necessarily becoming overly obligated to the landlord.  To that end, the franchisor will want the landlord to enter into a rider to the lease which addresses a number of issues which give the franchisor leverage to maintain indirect control of the premises.  

LEASE RIDER FROM FRANCHISOR’S PERSPECTIVE:

Matters likely covered in the rider are: 1) requiring the landlord to keep the franchisor informed of important events that occur during the life of the lease, such as tenant default, amendments to the lease, and  assignment of the lease by the landlord;  2) limiting the name under which the business can operate; 3) restricting approved uses of the premises; 4) restricting the landlord from leasing other space in its property to competitors; and 5) allowing the franchisor or its chosen replacement franchisee to assume the lease if, regardless of the reason, the franchisee ceases operations.

WHAT LANDLORD MAY WANT TO SEE IN LEASE RIDER:

While some landlords sign riders without requiring changes believing it good to have a well-known business included in its tenant mix, more sophisticated landlords will push back and require concessions from the franchisor in the process. 

One especially important example of a competing interest arises when a landlord wants to take action against a defaulting tenant.  At such a time, a landlord wants freedom of action against a tenant in default.  The lease will be written to allow a landlord to act quickly once any cure period for a tenant default has expired.  However, the franchisor, not wishing to lose the location to its system, will want the opportunity to replace the current franchisee.  Accomplishing such an outcome will take time and the landlord may not wish to wait an extended period of time, especially if it has obligations to third parties, such as its lender, which restrict its own choices.

This clash of interests may be ameliorated by amending the proposed rider to impose certain conditions on the franchisor, such as:  1) setting a limit on the additional time the franchisor will be allowed to assume the lease or identify a substitute franchisee after the notice of default had been issued; 2) requiring that all monetary and non-monetary defaults be cured before the lease is assigned; 3) requiring that any substitute franchisee meet the landlord’s criteria as to financial capability and operating experience; and 4) requiring that the rent be adjusted to the then-fair market rental value for the premises.

All negotiators know that no deal is ever perfect for one side or the other.  However, if each understands what is really important to the other side, accommodations can be arrived at that allow all parties to walk away as winners.

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