Unless the franchisee is operating a mobile franchise or working from home, chances are the franchise will require a lease on a fixed premises. Although there is no ‘one size fits all’ approach to franchising and leasing, franchisors and franchisees typically use one of three options to lease the premises:

  1. Franchisee locates the premises, negotiates the lease and holds the lease.
  2. Franchisor finds the premises, negotiates the lease, enters into the lease and then transfers the lease to the franchisee.
  3. Franchisor locates the premises, negotiates and enters into the lease, and licenses occupation to the franchisee.

The following factors will ultimately drive what leasing method a franchisor (or franchisee) chooses:

  • nature of the franchise system;
  • risks that each party is prepared to take; and
  • the level of control that a franchisor wishes to retain over the business’ premises.

We set out below some of the advantages and disadvantages of each different type of leasing option.

1. The Franchisee Locates the Premises, Negotiates the Lease and Holds the Lease

Click here to view table.

2. The Franchisor Finds the Premises, Negotiates the Lease, Enters Into the Lease and Transfers the Lease to the Franchisee

Click here to view table.

3. The Franchisor Locates the Premises, Negotiates and Enters Into the Lease, and Licenses Occupation to the Franchisee

Click here to view table.

Key Takeaways

We generally recommend that the franchisor (through a separate leasing entity) sign the lease but the franchisee provides the personal guarantee. In this way, you get the benefit of control without the risk associated with the personal liability of the lease. Of course, there is still the responsibility of the leasing company to pay rent if the franchisee abandons the site, but at least the franchisor does not wear any personal liability in relation to the lease.

The precise circumstances of your business should determine which option you adopt.