|To lease or not to lease? That is the question|
By Chad Finkelstein
October 2, 2012
When it comes to placing a franchisee at a particular location, franchisors generally have two options – be the tenant or don’t be the tenant.
One of the most common lease arrangements in franchise relationships is where the franchisor negotiates a lease for the premises, enters into the head lease with the landlord and subsequently sub-leases the space to the franchisee. Landlords like the sublease model because they have the franchisors (i.e. the party with the deeper pockets) on the hook for the lease, which is the party they would prefer to have recourse against if problems arise. Franchisees like the sublease model because they obtain the benefit of the franchisor’s bargaining power, due to its size and experience, to negotiate more favourable lease terms than the franchisee likely could on its own.
The sublease model is also an attractive option for the franchisor because, assuming it’s a desirable location, it can retain possession of the premises as franchisees come and go over time. There is also the added advantage that a franchisee is less likely to compete with a franchisor post-termination of the franchise agreement if it doesn’t have the location anymore.