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Franchisee as a prospective tenant – landlords, what must you consider?

The UK is home to 900 franchise systems with a total of 48,000 franchise outlets but still lags WAY behind the United States, which in 2022 had an estimated 792,000 franchise outlets employing almost 8.5 million people. However, with retailers realising traditional expansion is capital expenditure intensive, once you take into account legal fees, rent deposits, SDLT and fit-out, interest in franchising in the UK is on the up, and you can now buy into anything from M&S food stores to competitive socialising concepts. As a result, landlords will inevitably have to consider franchisees as potential tenants, so we’ve put together a list of five pointers for you to consider if approached to let premises to franchise businesses… in no particular order:

Who is the tenant?
Franchisors often elect either:

(a) to take premises themselves and then sublet the whole of the premises to a franchisee; or

(b) to allow the franchisee to find the premises and sign the lease directly.

Some multi-unit franchisees may ultimately provide a better covenant than that of the franchisor and can provide a better risk profile if they operate several different brands.

Are you being asked to make concessions?
Many franchisors look to standardise their leases and limit a landlord’s influence during the term. Typical concessions include:

– The ability to make alterations in the franchisor’s corporate style without the need to obtain prior approval.

– Freedom to assign or sublet to franchisees without consent.

It’s important to consider the effect of any such concessions on the amenities or value of the reversion. An ability to freely assign, for example, could lead to a guarantor or parent company being released without reference to you.

If you are minded to agree to concessions, consider whether these should be in the body of the lease or by way of a personal concession to the franchisor and their franchisees.

Do you need a right of pre-emption?
Some landlords don’t want units back and are just happy to have a tenant, but if your premises are in demand, you will not want to allow a tenant to assign to a lesser covenant or undesirable concept. A pre-emption is one way to protect yourself.

Typically, a pre-emption right requires a tenant to offer a lease back to you before transferring it to a third party. You will usually be required to match any premium offered by a third-party assignee but can seek to negotiate a cap to any premium at a certain multiplier of the rent. Whether you can do so will depend on the respective bargaining power of the parties. Whilst market circumstances may mean you may not always want to exercise a right of pre-emption, it’s always a good idea to have a choice.

Can you charge a turnover rent?
Turnover rent is a way for parties to share an element of transactional risk. Typically, the annual rent is reduced to around 80% of the market rent, and a balancing payment is made based on a percentage of turnover. If the franchisee is occupying as a tenant under the lease, then turnover rent calculations will be similar to those usually seen in a standard lease, although tenants may look to deduct royalty or IP payments from their turnover. Subleasing structures are less likely to work with turnover rent as the immediate tenant franchisor won’t be trading from the unit.

Will the permitted use work for you and the remainder of your building or estate?
Whilst a franchisee will need to operate in accordance with their franchise agreement, you should ensure the permitted use works for you. If a franchisee has leased the premises directly, you should build in sufficient protections to prevent them from switching franchises to a more intrusive or unacceptable concept.

Keep open obligations can be difficult to enforce, but you can protect tenants in the remainder of your estate or building by imposing limitations on delivery and offensive smells or require effective extraction.

If you are a portfolio landlord looking to ensure your leases cater for the changing business landscape, then contact the Real Estate team at Greenwoods Legal LLP. We are happy to assist and have the experience to guide and advise you.


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