Limit Franchisor's Ability to Freely Assign and Sublet

Franchisor tenants in today's market are demanding that their leases give them ample freedom to sublet or assign to any franchisee they choose without your prior consent. Franchisors make this demand because they don't want you putting any limitations on which franchisees they can do business with.

Keeping control of your building is key, but if you want to maintain low vacancy levels, you might have to compromise. A good way to do that is to give the franchisor tenant the right to sublet or assign if the franchisee meets certain financial criteria and business criteria spelled out in the lease. This compromise protects you from undesirable franchisee tenants, but it still leaves a significant loophole.

If you agree to grant the right in exchange for ensuring that the franchisee tenant meets specified criteria, there's nothing to stop the franchisor from subletting or assigning the space multiple times—in essence turning the space into a revolving door for franchisees. This repeated change in franchisees can create havoc in your building or center.

To protect yourself against the revolving door situation, limit the number of times a franchisor can sublet or assign the lease to a new franchisee without your consent, says New Jersey attorney Kathleen S. Cook.

Franchisor Could Use Space to Generate Fees

It's not uncommon for a store to fail. The harsh reality is that some stores just don't work in certain areas—like a ski shop two blocks away from Miami Beach. But that might not stop a franchisor from opening a store that it knows more than likely won't be successful and subletting or assigning it to a franchisee.

A franchisor generates a great deal of its income from the franchisee fees that it collects from each new franchisee. So, even though the Miami Beach ski shop will probably fail, the franchisor could simply find another unsuspecting franchisee to move in and take over the business—and collect a fee each time. The franchisor could simply sublet to the new franchisee, or in an assignment situation, get the old franchisee to assign the lease back to it then assign it to a new franchisee, explains Cook.

Even though the business itself is a failure, the franchisor still makes money off the franchise fees. In fact, the greater the turnover of unsuccessful franchisees, the more franchise fees the franchisor can collect.

Aside from the ethical problem you might have with watching a franchisor collect fees from unsuspecting franchisees, repeated changes in management and closings and re-openings of the store could have a negative effect on your shopping center, says Cook. And on top of that, if you are collecting percentage rent, a failing tenant isn't going to be able to pay you much.

Limit Number of Consent-Free Sublets or Assignments

To protect your building or center, as well as your bottom line, limit the number of times the franchisor tenant may sublet or assign the lease without your consent. Cook suggests starting off reasonably by allowing the franchisor to sublet or assign the lease without your prior consent only once to a franchisee (and only to a franchisee that meets certain criteria spelled out elsewhere in the lease) [Clause, par. a]. By limiting the number of consent-free sublets and assignments, you've made it impossible for the franchisor tenant to have a revolving door of franchise operations by putting in franchisee after franchisee into the space without your consent.

Franchisors may push back against this one-shot restriction. If that's the case, compromise and give them two or three consent-free sublets or assignments—especially if the lease is long term (10 to 15 years).

After the consent-free sublets or assignments are used up, the franchisor must get your consent to any future sublet or assignment to a franchisee—just as it would have to with any non-franchisee subtenant or assignee [Clause, par. b].

Practical Pointer: It's also a good idea to bar any store from closing during the changeover of subtenants or assignees. The point is to prevent disruptive closings and re-openings of the franchise. To do this, have the lease require the franchise business to stay open and be adequately staffed continuously during the sublet or assignment transition. Also, you could require the franchisor to hire a manager to run the business during the interim.

Insider Source

Kathleen S. Cook, Esq.: Beattie Padovano, LLC, 50 Chestnut Ridge Rd., Ste. 208, Montvale, NJ 07645; (201) 573-1810; KCook@beattielaw.com.

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