As a franchisor, deciding whether to hold the lease or let your franchisee is a critical decision. Both options have advantages and disadvantages, and the right choice depends on your business model and risk appetite. Here’s a breakdown of the benefits and challenges of each option.
Benefits of the Franchisor Holding the Lease
Securing More Sites
For larger landlords, franchisors are often more attractive tenants than franchisees. Holding the lease can open doors to premium locations that might otherwise be out of reach. Known brands with strong financial backing tend to appeal more to landlords than smaller, individual operators.
Standardising Lease Terms
As your network grows, dealing directly with landlords allows you to standardise lease terms. This can simplify negotiations and streamline management, especially with larger landlords who prefer uniformity across agreements.
Greater Control
When you hold the lease, you have direct control over the property. This can be critical for ensuring compliance with brand standards. If a franchisee underperforms or breaches the franchise agreement, you can step in without needing the landlord’s approval.
Drawbacks of the Franchisor Holding the Lease
Increased Risk Exposure
Holding the lease comes with significant risks. If a franchisee falls behind on rent, the franchisor remains liable to the landlord. This liability can exceed the security deposit or bank guarantee, leaving you to cover the shortfall.
Handling Abandonment or Liquidation
If a franchisee abandons the site or goes into liquidation, the franchisor must step in. You may have to take over operations or negotiate an early termination with the landlord. Both options can be costly and time-consuming.
Mitigating Risks as the Leaseholder
If you decide to hold the lease, you can mitigate risks by:
- Negotiating the right to grant occupation rights to your franchisee.
- Requiring franchisees to handle practical lease obligations, such as security deposits and insurance, which should be covered by an operative clause in the lease.
- Monitoring debt levels closely. Take action, like issuing a breach notice, if arrears exceed the security amount or another threshold sum.
Benefits of the Franchisee Holding the Lease
Lower Financial Risk
When franchisees hold the lease, the franchisor avoids direct liability to the landlord. This reduces financial exposure, particularly if a franchisee defaults on rent.
Fewer Administrative Burdens
The franchisee is responsible for managing lease obligations, such as payments, insurance, and security. This frees up the franchisor to focus on other aspects of the business. The Franchisee will also be responsible for the lease negotiation, stamping, and registration costs, saving the Franchisor both effort and money.
Drawbacks of the Franchisee Holding the Lease
Reduced Control
When the franchisee holds the lease, the franchisor has less say over the property. If the franchise agreement ends, the franchisor may not have immediate access to the site – this can be problematic in circumstances where a Franchisee changes the signs.
Difficulty Securing Prime Locations
Landlords of large shopping centres and premium properties often prefer dealing with franchisors. Letting the franchisee hold the lease may limit access to high-traffic locations.
Mitigating Risks When the Franchisee Holds the Lease
If you let the franchisee hold the lease, you can still protect your interests by:
Signing a Step-In Deed
A step-in deed gives the franchisor the right to take over the lease if the franchise agreement is terminated. This can safeguard your brand and allow you to continue operations at the site.
Monitoring Franchisee Performance
Even when the franchisee holds the lease, regular monitoring is essential. Stay informed about their compliance with lease terms and address any issues promptly.
What Should You Choose?
Assess Your Business Model
The decision depends on your goals and resources. If securing prime locations and maintaining control are priorities, holding the lease may be the better option. However, if you want to minimise risk and administrative burdens, letting the franchisee hold the lease might work best. Who your lessors will be also factors into the equation – if you’re looking at the big shopping centres, it’s more likely the Franchisor or its associate will hold the leases, as is common across larger franchise networks.
Work with a Franchise Lawyer
Whether you hold the lease or not, the right legal protections are crucial. A franchise lawyer can help draft agreements, negotiate terms, and put safeguards in place to protect your interests.
Final Thoughts
Both options have benefits and risks. Franchisors who hold the lease can gain control and access to premium sites but face increased financial exposure. Franchisees holding the lease reduce the franchisor’s risk but may limit opportunities for expansion. Whichever you choose, proper legal advice is essential. Consulting a franchise lawyer ensures your lease arrangements align with your strategy and protect your business.