Shopping centers often include tenants operating franchised businesses the publicknows and loves. Landlords understand the appeal of such franchises, since shoppers already have familiarity with them. For business purposes, such franchises are usually ideal tenants.
At the same time, landlords may not appreciate the legal considerations that arise with franchise tenants. The issues are as basic as the nature of the operation itself. If a single parent company owns all stores, a legal franchise may not be involved.
If independent operators, the franchisees, each own one or more stores and contract with an umbrella entity that provides a business plan, operations manual and marketing and advertising support, a franchise usually is involved. The umbrella entity (the franchisor) may also own some store locations itself, allowing the independent owners to operate their stores through a franchise agreement.
Prudent landlords should determine which structure they face at the start of any lease negotiations.
Issues with franchise tenants With this type of tenant, landlords should consider various legal issues during lease negotiations. First, the landlord should find out if the tenant needs the franchisor's permission to enter into the lease. To make this determination, the landlord should obtain a copy of the franchise agreement from the tenant. If the agreement requires such franchisor consent, the landlord may want to include the franchisor in lease negotiations to ensure this consent. The landlord should also make such written consent a condition of the lease.
Similarly, the landlord should make the franchisor's consent a condition to any assignment or subleasing by the tenant. In both these situations, the lease should specify that the tenant bears the burden and cost of obtaining the franchisor's consent.
Related issues arise concerning the tenant's performance under the lease and the franchise agreement. Since the continuing effectiveness of the franchise agreement and the right to use the franchisor's name are key to the tenant's business, the lease should require that: 1) the franchise agreement remain in effect and permit the tenant to perform under the lease, and 2) neither the tenant nor the franchisor assign or breach the franchise agreement. The lease should also require the tenant to copy the landlord on any notices it sends to or receives from the franchisor, and to avoid performing any act under the franchise agreement that would limit the tenant's ability to perform under the lease.
To obtain regular confirmation of the matters addressed by such provisions, the lease should include a provision for the franchise agreement mirroring the normal estoppel certificate requirement. Namely, the landlord should have the right to require the tenant to obtain the franchisor's signature on a certificate verifying the matters covered by the provisions described above.
Ensuring the value of the franchise Other topics to address concern the tenant's use and possible actions by the franchisor affecting that use. The goal is to ensure that the value of the franchise continues to benefit the tenant's operations. Accordingly, the use clause in the lease should require the tenant to operate its business under the name and in the manner described in the franchise agreement.
In addition, to supplement the normal tenant radius clause, the landlord should request that the franchisor obey radius restrictions concerning the opening of nearby stores. If acceptable to the franchisor, the landlord can add the restriction to both the franchisor's consent to the original lease and to the certificate the tenant must obtain from the franchisor during the lease.
As these issues demonstrate, landlords should consider adding a number of extra lease provisions when dealing with franchisees. Landlords should keep in mind that these types of provisions bear equally on tenants whose operations rely heavily on licenses, trademarks or patents belonging to third parties. In these circumstances, by building in requirements concerning the third party, a landlord can better protect its interests.