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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