Achieving Results, Exceeding Expectations

Real Estate Law

Keep Your Eyes on the Franchise

By Todd Schafer

The wave of franchised businesses shows no signs of abating, and the specific issues related to having a franchisee as a tenant are numerous. Among the lease-related matters that are often, if not always, discussed and negotiated in these potential deals:

  • If the tenant has a narrow use clause or is required to operate under a specific trade name, then the landlord may want to include text in the lease requiring the tenant to maintain its franchise agreement in full force and effect (and include remedies in the lease that result from defaults by the tenant under the franchise agreement).
  • A franchisor is likely to request a provision in the lease (or in a separate addendum, rider, or other agreement) for its benefit requiring the landlord to provide the franchisor with notice of the franchisee’s default under the lease (and potentially with an opportunity to cure such default).
  • A franchisor will also customarily desire for the landlord to allow the franchisor the right to take possession of the leased premises for a period of time to either install a new franchisee, begin operations as a franchisor-operated location, or remove franchise specific property and franchisor’s intellectual property. A landlord would be wise (to the extent the landlord does not have the sole and absolute discretion to approve a new tenant/operator) to include certain standards in the lease that must be met by the new occupant (e.g., the operator is the franchisor itself or a duly authorized franchisee of the franchisor; the operator has a tangible net worth of a certain minimum amount; and the operator is fully trained, has a good reputation, and is capable of operating the business required to be conducted by the tenant in the leased premises).
  • A franchisor may also want the lease to provide the franchisee-tenant with the right to install certain alterations and improvements (including signs) that reflect the standard trade-dress of the franchisor. At a minimum, limitations on these rights need to be inserted for other existing agreements and applicable law.

Lease negotiations involving franchised operations are often more difficult to complete given the insertion of a third party into the discussions (or, at least, given the specter of the franchisor). The matters identified above are certainly not the only issues that might need to be resolved; they are, however, items that are frequently discussed in these types of potential transactions.