Thursday, January 23, 2014

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

By Barbara I. Berschler

Part 3 of 3

From the Landlord’s Point of View

In this final installment of my blogs that have examined some overlapping, and therefore potentially conflicting, questions faced by a franchisor, franchisee and landlord, I consider some issues in the business deal from the point of view of the landlord and how the other parties may respond.


A major objective of a landlord with a significant retail tenant mix (i.e., a shopping or strip center as opposed to a mixed-use project with first-floor and/or lower level retail) is to maintain a balance of the kinds of goods and services offered in its project.  It wants a varied mix so that consumers have more reasons to visit the complex with the expectation that sales among the tenants will increase making them more economically stable.  Additionally, the landlord may have committed itself not to rent to certain competing businesses. 


Under such circumstances, the landlord on the one side and the franchisor and franchisee on the other side likely have conflicting interests.  In this context, the lease’s “Use” clause is critically important, because the landlord does not want to commit to one kind of tenant, say a donut and coffee shop, only to find out later that the tenant has expanded into also selling yoghurt.  Yet from the point of view of the franchised business, it may need to expand into other product lines because the public has tired of donuts.  Arriving at a solution to allow for adjustments in the franchisee/tenant’s use of the space without asking the landlord to undermine its own position vis-à-vis its other tenants requires careful accommodations among the parties.


Another instance where the interests of the landlord and the franchisor may conflict can arise where the landlord charges percentage rent (i.e., rents based on the sales numbers of the tenant).  For example, in order to maximize the opportunity to collect such rents, the lease may restrict the tenant from having a competing business within a certain radius of the shopping center.  However, a major goal of the franchisor is to maximize its presence in a particular geographic area.  It does that by opening more franchised outlets.  When it opens more franchised outlets, those compete with the existing franchisee causing fewer customers to come to its location.  In turn, the existing franchised store does not generate the same number of sales, which lessens the amount of percentage rent the landlord can collect.

Under this scenario where the lease sets a radius restriction for identical businesses and where the franchise agreement gives the franchisor unfettered rights to open stores, the tenant may be placed in an untenable position.  On the one hand, the tenant’s interests and those of the landlord may actually be in alignment against that of the franchisor, but, at the same time, the tenant cannot control what the franchisor does in opening new establishments within the restricted radius which had been imposed by the lease.  Knowing that such a problem can exist allows the landlord to require concessions from the franchisor during negotiation of the rider.  Unless a mutually satisfactory arrangement can be achieved, such diametrically opposed objectives could cause problems and perhaps result in the deal floundering. 

These blogs have examined only a few of the overlapping issues which can greatly affect the outcome of any negotiation among these three parties.  When each negotiator understands the interests of the other parties, not simply its own, there is a greater likelihood of arriving at creative accommodations.

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