• Franchisor Lease Addenda - Issues for Landlords
  • September 23, 2011 | Authors: Seth M. Rotenberg; William D. Shaughnessy
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • There are close to one million franchised business establishments, and this form of conducting business continues to expand annually. A shopping center trade organization estimates that approximately 40% of leases that are currently being signed are between landlords and franchisees. Many franchisors require that their franchisees obtain an addendum to their leases to grant the franchisor’s rights in the leased premises. Lease addenda required by a franchisor will typically have some provisions that landlords find attractive -- for example, the right of a franchisor to cure a lease default by a franchisee because it carries with it the implication that the franchisor will pay the rent when the franchisee does not. Conversely, franchisors customarily insert provisions in their standard lease addenda that can cause concerns to landlords. A few of these clauses are summarized below.

    • Notices of Defaults. Most franchisor lease addenda provide that the landlord must give the franchisor notice of any default by the tenant. This could be problematic for the landlord. Under the lease, there may be some defaults by the tenant that do not require that the landlord give notice to the tenant, such as non-payment of rent. If a landlord signs the standard franchisor lease addendum, the landlord may be obligating itself to give the franchisor notices that it is not required to give to the tenant. The notice clause in the franchisor lease addendum needs to be tailored to the notice requirements in the lease.

    • Cure of default. Many franchisor lease addenda provide the franchisor with the right to cure any default by the tenant, and frequently such provisions give the franchisor a cure period that is in addition to the cure period that might be provided to the tenant under the lease. Landlords need to consider how many times a franchisor will have a cure right as well as how long is reasonable for a cure period in light of cure rights given to the tenant.

    • Franchise Agreement Default. Commonly franchisors include a provision in their lease addenda by which a default under the franchise agreement would constitute a default under the lease. Landlords would not want technical defaults under a franchise agreement (e.g., reporting requirements) to trigger a lease termination. The landlord may want to require that the franchisor simply de-brand the location, but the landlord may not want to lose its tenant.

    • Assignment. Franchisor addenda frequently provide that the franchisor will have a right to take an assignment of the tenant’s interest under the lease (in the event of default or otherwise) and permit the franchisor to assign the tenant’s interest to a new franchisee. If the franchisor assumes the liabilities of the tenant, there is no significant detriment to the landlord; however, franchisors generally seek to avoid such obligations. Additionally, a landlord should have approval rights over any new franchisee to which a lease is assigned. These issues need to be negotiated.

    • Termination of Franchise Activities. Many franchisors include a provision in their standard lease addendum that enables the franchisor a period of time to remove all franchise marks and sell fixtures and equipment in the event that a franchise is terminated. Landlords need to consider whether such activities and “going out of business” sales are consistent with the shopping center’s character and are permitted under the lease.

    • Silent provisions. Most franchisor lease addenda are relatively short - two or three pages in length - and do not contain many “boilerplate” provisions of the lease. If there is a waiver of jury trial provision in the lease, but not in the franchisor addendum, the landlord may find itself in a situation where it may be before a judge in a dispute with the tenant, but before a jury in a dispute with the franchisor. The failure to match lease provisions with the franchisor addendum can have adverse consequences to the landlord.

    These are just a few of the issues that a landlord must consider when presented with a “standard” franchisor lease addendum. The landlord should not sign the “standard” franchisor lease addendum without considering the impact such addendum can have on the operations at the leased premises. Franchisor issues can generally be negotiated and resolved to the satisfaction of all parties - the landlord, the tenant/franchisee, and the franchisor. We suggest that the landlord discuss such issues with counsel.