A step-in deed is a crucial document in franchising. It’s a tripartite agreement between the lessor (landlord), the lessee (franchisee), and the franchisor. When a franchisee or their associate holds the lease directly, this agreement gives the franchisor important rights. Its main purpose is to let the franchisor require an assignment of the lease if the franchise agreement or licence agreement ends.
Why Do Franchisors Need a Step-In Deed?
A step-in deed protects the franchisor’s brand and interests. Without it, a franchisee could leave the system and keep operating in the same location under a different name. This risk is often called “flipping the signs.” A step-in deed ensures the franchisor can step in and continue operating the site or transfer it to another franchisee.
Benefits for Lessors
Lessors are often willing to sign step-in deeds. For them, it increases the likelihood of a reliable tenant remaining on-site. If the franchisee exits, the franchisor can step in and continue operations, often under the same brand. This continuity benefits both the lessor and the franchisor.
Key Provisions in a Step-In Deed
Notification of Breach or Termination
One common clause requires the lessor to notify the franchisor of any issues with the lease. For example, the lessor must inform the franchisor if:
- The franchisee breaches the lease.
- The lessor issues a notice of intention to terminate.
- The lessor takes any action to end the lease.
This notification gives the franchisor time to act before the lease is terminated. It’s a safety net to protect their investment and ensure the site remains part of the franchise network.
Right of Assignment
Another essential clause is the franchisor’s right to require an assignment of the lease. If the franchise agreement ends, the franchisor can:
- Take over the lease directly.
- Assign it to another franchisee.
This right ensures the franchisor maintains control over the site and its operations. Without it, the franchisor risks losing a valuable location.
Condition of Franchisor Consent
Step-in deeds are typically signed at the same time as the lease. They’re often a condition of the franchisor’s consent to the franchisee holding the lease. This timing ensures the franchisor’s rights are in place from the start.
When Should Franchisors Use Step-In Deeds?
Franchisors should require step-in deeds whenever their franchisees hold the lease directly. This includes leases held by franchisees’ associates. A step-in deed is a vital tool for protecting the brand and ensuring continuity of operations.
Practical Tips for Franchisors
- Negotiate Early
Include the requirement for a step-in deed in your franchise agreements. Work with your franchise lawyer to ensure it’s a standard condition. - Work with the Lessor
Explain the benefits of a step-in deed to the lessor. Highlight how it protects their interests by keeping a reliable brand in the site. - Monitor Lease Compliance
Even with a step-in deed, stay vigilant. Monitor franchisees’ compliance with lease obligations. Act early if you see signs of trouble. - Ensure Proper Drafting
Use clear language when drafting step-in deeds. Engage an experienced franchise lawyer to avoid loopholes or ambiguities.
Final Thoughts
A step-in deed is a simple but powerful document. It gives franchisors control over leased sites and protects the franchise network. By requiring this agreement, franchisors can safeguard their brand and ensure continuity, even if a franchisee exits.
Franchisors should always involve a franchise lawyer when preparing step-in deeds. With expert advice, you can negotiate effective terms and protect your business for the long term.