leases for franchises – how long?
The recent case of Miscela Limited and
another v Coffee Republic Retail Limited [2011] All ER (D) 150
(Jul) highlights the risks faced by franchisees who are required to
operate from retail or business premises and enter into a lease or
sublease for those premises as well as the franchise agreement.
Where the operation of a franchise requires
commercial property, consideration must be given to the terms of
any commercial leases in place allowing the franchise business to
operate from that property. Importantly, this should be done with
the terms of the franchise agreement in mind. A franchisee
should not rely on the terms of the franchise agreement to provide
him with rights of occupation, which was demonstrated by the
failure of the franchisee in Miscela to persuade the Court
that its franchise agreement did give it such rights
Private landlords will often refuse to grant a
lease direct to a franchisee because of poor covenant strength and
an unproven track record. They will therefore require the
involvement of the franchisor, either by granting a headlease
jointly to the franchisor and franchisee or more commonly by
granting a headlease to the franchisor, who then sublets to the
franchisee. Some landlords are prepared to grant a lease direct to
the franchisee.
Professional advice should be sought when
negotiating the new leasehold documentation. Amongst other
considerations, the franchisor and franchisee should ensure that
the term of the leases marry up with the term of the franchise
agreement. The consequences of failing to do so can be
severe.
Where the franchise agreement terminates prior
to the leases, the franchisee is potentially left with premises
with no support from the franchisor or the right to continue to
operate as part of that franchise. However, the obligations to pay
the rent and carry out the repairing liabilities will continue. The
franchisee will also have to comply with any post-termination
non-compete clauses in the franchise agreement, therefore, may not
be able to continue to use the premises for a similar business even
as an independent trader.
The franchise agreement may address this by
giving the franchisor an option to acquire the sublease following
the end of the franchise agreement. That, however, remains merely
an option and in tough trading times a franchisor may not exercise
it but prefer instead to pass as many liabilities on to the former
franchisee as possible.
Alternatively, the leases might come to an end
earlier than the term of the franchise agreement. Where the
franchisee has no statutory right to remain in occupation (as is
usually the case), the franchisee potentially has no premises from
which to operate his business. While the franchisee is in
occupation the task will be to persuade the landlord to grant a new
lease for a further term, and whether there is success in doing so
will depend on market conditions.
Some franchise agreements will contain options
for an extension of the term of the agreement, and this should be
reflected in the leasehold documentation by way of a similar option
for a further leasehold term.
The parties must beware of other potential
methods of the leases being terminated, which would invariably
cause disruption to the business, but ultimately apply to any
business occupying a leasehold premise.
For example, the superior landlord's operation
of a break clause in the headlease will automatically bring to an
end the term of the sublease. A break clause in favour of the
franchisor in the sublease should be queried by the franchisee; why
is it being proposed? Whilst a responsible franchisor may only
exercise the break where appropriate to do so, a new franchisor as
landlord could operate the clause requiring vacation of the
premises by the franchisee. Without explanation, such a clause
should be resisted. Care must also be taken if the sublease was not
granted by the franchisor but by a third party, as Miscela Limited
found to its detriment.
A further example is where the franchisor
breaches of the terms of a headlease and the superior landlord
forfeits the headlease. That also brings to an end the
sublease. 'Relief from forfeiture' is a possibility, allowing the
franchisee back in to occupation, but this will require the remedy
of the breach of the headlease, which in current economic times is
not always something that struggling franchisors or cash-strapped
franchisees have been able to do.
