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Two-Part Series: Leases from the Franchisor’s Perspective – Part 1

Franchisors whose business model involves physical locations for their units have certain specific interests and concerns relating to the leases entered into between their Franchisees and the Franchisees’ landlords. Franchised locations, by virtue of being physical and visible to the public, can develop an ongoing brand awareness associated with their locations. Franchisors strive to protect that brand awareness by imposing certain restrictions and conditions on the Landlords who own and/or lease those locations.

Those interests and concerns include:

1. Proper signage and use of the Franchisor’s mark

2. Protection against competition by the Landlord or other tenants

3. Restriction against Premises being used for anything other than the Franchisor’s branded business

4. Franchisor’s right to be furnished information the Franchisee/Tenant furnishes the Landlord

5. Franchisor’s right to be notified by the landlord in the event of default or termination of the lease, and the right to cure the defaults

6. Franchisor’s right to take over the lease in the event the Franchisee/Tenant’s rights under the lease are terminated

7. Franchisor’s right to enter the Premises to make modifications necessary to protect the Marks

8. Franchisor’s right to renew or extend the Lease if the Franchisee/Tenant fails to do so

9. Having the Landlord and Franchisee/Tenant enter into a Collateral Assignment of Lease, which gives the Franchisor (or its designee) the right to assume the Lease upon a default by Franchisee of the Lease and/or of the Franchise Agreement.

10. Prohibiting the Landlord and Franchisee from amending or terminating the Lease without the Franchisor’s approval.

The above list can be addressed by having appropriate provisions in the Franchise Agreement that the Franchisee signs. It is typical in Franchise Agreements that Franchisees are required to obtain the Franchisor’s prior written consent to the lease that the Franchisees negotiate with their Landlord. Many Franchisors require a Rider to Lease (“Lease Rider”) that addresses the list above, and Franchisees are instructed to furnish the Rider to their prospective landlord at the outset of lease negotiations.

Carter & Tani has experience in drafting language for Franchise Agreements, Riders, and Collateral Assignments of Lease that will help give Franchisors the protections listed above.