Franchise Lawyer Blog

Real Estate and Franchising

Many franchising lawyers evolved into that practice from other more traditional areas of practice: intellectual property, licensing, business development. In my case it was real estate law. It is a logical connection. The vast majority of franchisors need to have reliable counsel with respect to real estate matters; the exception being “franchises on wheels,” such as Sir Grout, franchising client about whom we have written in the past.

If you are a typical franchisor, your franchisees will open a physical location somewhere. You want to have oversight and approval of where the site is located and the ability to veto any site that does not meet your criteria for a franchise location. The franchisor should develop a model of an ideal site and an acceptable site, using identifiable and verifiable criteria. The FDD and franchise agreement should contain detailed provisions for how sites are located and presented for approval, with ample opportunities to inspect and specific time frames that will govern the parameters within which this must be accomplished. The successful location of a site and completion of a lease agreement are the primary factors that will determine how quickly the franchise can open. The more specific these requirements are, the more predictable your schedule of franchise openings will become.

As franchisor you will want to make sure that the lease contains specific provisions that will enable monitoring of the franchisee’s operations and, if necessary, the ability to step in and take over. Your FDD and franchise agreement should contain a list of required lease provisions or, as an alternative, an actual lease rider as an exhibit that must be attached to and executed as part of any lease. You will need a collateral assignment of lease executed in advance by the franchisee and the landlord, so that in the event of a franchisee default, there is no question about your right to step in and take possession. And if you do step in, the lease must be clear that you are not assuming any of the franchisee’s past due or defaulted liabilities and obligations.

Will you as franchisor provide a guaranty of the franchisee’s lease obligations? You may be asked to. That decision depends on the site, of course, and the likelihood that you would want to continue to operate even if the franchisee folds. And if the site is attractive enough so that your continued operation of the site in the event of the franchisee’s failure is a real possibility, then you as franchisor have to look at the lease as a tenant would. Everything is potentially relevant to your ability to make money in a “company-owned store:” common area maintenance charges, tax escalations, electric and other energy charges, renewal rates and all other financial terms.

You must understand your franchisee as well. Even the most attractive site may be too much for a prospective franchisee: too much rent, too much space, too much of a challenge for an inexperienced operator.

We find that we discuss these matters with our prospective franchisor clients as we are assembling the data needed to put together their FDD. Most of them have a business model for the ideal store. We start exploring with them how many different types of places their franchisees may end up being situated in and crafting FDD disclosure and franchise agreement clauses that protect them in each of those cases.

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