FOR
FRANCHISOR, FRANCHISEE AND LANDLORD:
WAYS
A FRANCHISE AGREEMENT AND COMMERCIAL LEASE
MAY
CONFLICT
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.
LANDLORD
WANTS BALANCED TENANT MIX:
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.
IMPORTANCE
OF “USE” CLAUSE IN LEASE:
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.
EFFECT
OF RADIUS RESTRICTIONS IN LEASE:
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.