Franchise Issues in Commercial Leases

Commercial landlords and tenants are already faced with many issues during the course of negotiating a commercial lease agreement. When the tenant is a franchisee, the franchisor’s requirements (as outlined in the franchise agreement) add another layer of complexity to that process.

In some cases, with respect to the real estate, the franchisor may assist the franchisee in the franchise process, including selection of the franchise location and negotiation of the franchisor’s requirements in the lease agreement. Those requirements might also come in the form of an addendum or “rider” to the lease agreement. In either event, a Landlord inexperienced with franchisee-tenants may be hesitant to agree to franchisee’s (or franchisor’s) request to include the franchisor’s terms and conditions. Thus, it will be pivotal for the franchisee to educate the landlord and be tactful in its negotiation of the lease agreement.

For instance, one of the franchisor’s main concerns is protecting its brand. As a result, the landlord may be asked to agree to the franchisee’s specific terms relating to the interior layout, including build-out requirements, and external signage in the lease agreement. The franchisor may also require that the franchisee, without the consent of the landlord, be permitted to change various aspects of the leased premises during the term of the lease if the change is part of a national or state-wide franchisor re-branding campaign. From a general standpoint, the landlord probably won’t like that.

The franchisor may also request that it be provided with notices of the franchisee’s default and be provided with the opportunity to cure the same (which may benefit the landlord). Alternatively, the franchisor may call for the lease agreement to be assigned or transferred to another franchisee without the landlord’s consent.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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