For franchises operated from a fixed location (such as a shop or office) the conditions of a lease agreement are critical to the success of the business.
Unlike the Franchising Code of Conduct which is a national set of regulations which govern franchising, leasing regulations are determined at state or territory level with different regulations, and retail leases particularly are subject to an additional level of regulation by state legislation.
Irrespective of state leasing jurisdiction, franchisees may operate from a location when:
1. They lease the premises from the landlord themselves; or
2. The franchisor leases the premises from the landlord and provides arrangements for the franchisee to use the site.
Lease agreements are often as extensive, detailed and complicated as the franchise agreement, and involve many terms and conditions which legally obligate the franchise.
In addition to the more obviously important terms of a lease such as rent, outgoings and the term of the lease, there are a several other significant factors when considering a lease. These include:
· Permitted Use and Exclusivity;
· Trading Hours;
· Common areas;
· Bond or Guarantee;
· Relocation and Demolition; and
· Fit out and Services.
It is important for both the landlord and the tenant to avoid inadvertent breaches of a lease as a result of franchise arrangements. Often a retail lease will contain clauses such as non-assignment and preventing the tenant listed on the lease from parting with possession of the premises – which naturally occurs if the franchisor tenant licences a Franchisee to operate its business from the premises.
Other clauses which should be noted are those requiring the tenant, listed on the lease, to undertake obligations such as taking out insurance and providing a certificate of currency, payment of the rent and other obligations such as cleaning and making good the premises. Often the franchisor will require the Franchisee to undertake these obligations – if the lease does not contemplate that a third party will be fulfilling these obligations then on a strict interpretation of the lease the franchisor, as tenant, would be in breach if it did not, itself, complete these obligations.
It would be satisfactory to draft a clause which could contemplate generally that the Franchisee could undertake any of the obligations of the lease on behalf of the franchisor, although understandably most landlords will require the clause to acknowledge that the franchisor remains liable for the satisfaction of those obligations.