Retail franchisors can spend nearly as much time negotiating with landlords as they do dealing with franchisees. Here is the checklist for the 10 top points to cover in your next lease negotiation.
1. The right length term
Most franchisees (and their banks) want a lease term (or potential lease term with options) to match the franchise term. The best outcome is for the dates of both franchise agreement and lease to coincide although this is not always possible. Franchise agreements can provide for alternative premises to be found if the lease ends early and for termination of the franchise if suitable premises are not found in a reasonable time frame to allow relocation of the business.
2. Franchising and licensing clauses
A typical retail lease prohibits subletting, licensing or “parting with possession”, or at least not without landlord consent. It is a fundamental requirement for leases of franchised businesses that they allow a franchisee to occupy the premises where the franchisor holds the lease.
Failure to obtain the right to part with possession will mean allowing occupation by a franchisee will be a breach of the lease.
3. Assignment
Following on from this, whether a lease is held by franchisor or franchisee it should contain the right to assign (transfer) the lease to certain qualified assignees.
That is, the tenant should be able to transfer the lease to any franchisee or potential franchisee of the same franchise system approved by the franchisor, without needing landlord consent (or at least the landlord should not be able to withhold consent). Otherwise there is a risk that a landlord could withhold consent to a new franchisee with “inferior retailing skills” or less financial resources to the previous one or to the franchisor.
4. Fit-out contributions
Landlords frequently provide fit-out contributions or lease incentives to their tenants. How should a franchisor deal with these with respect to the franchisee?
Firstly the fit-out contribution is usually confidential and dealt with in a separate fit out deed or agreement. An exception can be negotiated to the confidentiality clause or the franchisee made a party so the franchisor can advise the franchisee of the details.
At the moment it is up to the franchisor to decide whether to tell the franchisee of the contribution. However the Franchising Code is under revision and one of the changes proposed for next year (2015) is the requirement to advise the franchisee if a lease incentive has been received and if it is going to be shared with the franchisee.
Many franchisors are therefore going to have to rethink how they handle this issue.
If the franchisor is intending to reveal the landlord’s fit-out contribution and pass it on to the franchisee then the franchisor should ensure that, like a landlord, it provides for the refund of the contribution on similar terms to the landlord if the franchise ends early.
Also as a landlord’s contribution is ordinarily allocated against certain works so that they remain the property of the landlord for depreciation purposes the franchisee should be made aware of this (as should its bank).
5. Branding and image protection
The consistency of the look and fit-out of your retail outlets is critical. Provisions about fit-out and refurbishment need to recognise that the franchisor tenant will have a national corporate image and this may conflict with the ideas of the landlord or its centre manager.
Landlords may have separate refurbishment requirements and that negotiation to make sure that these are consistent in both extent and timing is in everyone’s best interest.
6. Signage and marketing
Many franchise systems require their franchisees to display temporary or promotional signage or displays to reflect seasonal marketing campaigns. This marketing collateral is usually produced centrally and distributed to franchisees.
Leases often have strict requirements for landlord consent for displays and signs. In many situations it is not practical for consent to be obtained for this type of temporary display and an amendment should be obtained to permit promotional signage which conforms with the brand’s national image or marketing campaigns.
7. Usage and menus
As a general rule a broader usage favours the tenant. It is common for landlords to try to restrict food court retailers especially, to a set menu to avoid conflict between retailers and possible exclusive rights. It is preferable for franchised businesses to obtain a usage such as “Take away food outlet selling pizza, drinks and any other menu items of ‘Joe’s Pizza’ franchise”. This creates flexibility for the franchise as the nature of the business changes to allow it to add further items without seeking landlord consent.
Including the name of the franchise system in the permitted use has the potential advantage of preventing a franchisee tenant from “rebadging” but it may also limit potential assignees.
8. Notices
A lease of premises occupied by a franchisee should stipulate that the landlord’s notices to be served on the tenant are not just sent to the shop but also to the franchisor’s head office. If the franchisee does not pass on a notice from the landlord you may find out too late that the lease is about to be terminated or the centre demolished.
9. Bank guarantee
Most leases will require security in the form of a bank guarantee for several months’ gross rent. The franchisor should ensure that that the landlord understands that the franchisee will provide this bank guarantee and it should make sure that the bank guarantee is replaced if the franchisee leaves.
10. Insurance
The lease usually requires the tenant to take out certain insurances. Franchisors should make sure that it is permitted for the insurance to be taken out by a franchisee (noting the interest of both landlord and franchisor). Also a franchisor should ensure the lease allows them to cover the premises under any blanket insurance policy it holds.
A final word of caution; retail leases in Australia are covered by different legislation in every State and Territory, all of which seem to change frequently.
Franchisors and franchisees have certain rights and obligations under these laws (including disclosure obligations) and having a lawyer familiar with these laws look over your lease procedures on a regular basis is highly recommended if you don’t want to spend in your time in mediation or court at a later date over avoidable lease issues.