Lease of the Premises by a Third Party with Option in Favor of Franchisor. Moderator: Carl Zwisler Gray Plant Mooty Washington, DC 2010 IDI Annual Conference Torino, Italy June 11-12, 2010 . Be Careful What You Wish For.
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Gray Plant Mooty
2010 IDI Annual Conference
June 11-12, 2010
There are two tragedies in life. One is to lose your heart’s desire. The other is to gain it.”
- George Bernard Shaw
In the US, one FDD item requires disclosures about the duties of the franchisor to a franchisee. The first requirement in this item is:
Most franchisors whose franchisees operate from a fixed location choose B.
They also disclaim liability to the franchisee for their role in appraising a site or the terms of its lease, claiming that the final decision over these issues belongs to the franchisee.
At its essence, franchising is shifting investment obligations and risks to franchisees. If a franchisor will not invest in businesses operated by a franchisee, why would it invest in the real estate from which a franchised business operates?
When a franchisor takes over a franchisee’s store, the franchisee has usually fallen several months behind in royalties, rent and other amounts owed to the franchisor.
Most franchisors make little on rent they charge their franchisee subtenants. When franchisee/tenant defaults or is terminated, franchisor must find a new franchisee and/or hire a manager to operate the business. Often, reason for the default is related to the location.
Operating as a company owned store or re-franchising the store may be the only way to protect the lease investment.
What does it do for the brand?
Owning a location which is unprofitable for the franchisee, and having to recruit a new tenant or franchisee to occupy the location to reduce losses. Consider some statistics relating to vacancy rates:
India: store may be the only way to protect the lease investment.
Mall Vacancy Rate: 30%, Rents Falling
- Zmarter.com finances May, 2010
Exxon Mobil announced yesterday it's had it with the measly returns on selling gas to consumers. Following the industry trend away from the retail gas station business, the oil giant plans to unload the 2,200 stations it still owns.
BP expects to be rid of its company-owned stations in the US by the end of next year and Conoco Phillips is nearly out of the business altogether.
- www.minyanville.com June 13, 2008
If the objective is to control the location, keep it affiliated with the franchise brand, but avoid the risks of subleasing, conditional lease assignments or lease riders are the instrument of choice for most US franchisors.
Amendment to Franchisee’s lease signed by Landlord and Franchisee
Incorporates references to Franchise Agreement
Restricts use of premises to the franchised business affiliated with the franchise brand, but avoid the risks of subleasing, conditional lease assignments or lease riders are the instrument of choice for most US franchisors.
Requires notices of default and termination to be delivered to Franchisor in time for Franchisor to act
Franchisor has the option, but not duty, to cure breaches affiliated with the franchise brand, but avoid the risks of subleasing, conditional lease assignments or lease riders are the instrument of choice for most US franchisors.
Franchisor has the right to enter the premises to cure breaches
Franchisee has unconditional right to assign lease rights to Franchisor or its affiliates or successors, without changes in lease terms, and without executing a guaranty of the Lease
Lease assumption only occurs, and Franchisor only assumes liability, after notifying Landlord and Franchisee of its assumption
Franchisor is not liable for pre-assumption obligations of Franchisee to Landlord
After assuming the lease, Franchisor may assign lease to a new Franchisee, with Landlord’s consent, but without changes in lease terms
Franchisor has right to receive all reports of sales, income that Landlord receives from Franchisee
Landlord has right to receive notices of default or termination from Franchisor.
Allows Landlord to have advance notice of potential problems.