Should a franchisor sign the head lease and sublease the space to a franchisee or allow the franchisee to enter into his or her own lease agreement with the landlord? Both options are viable, but which is more practical and better for you?
With the first choice, the franchisor maintains much more control, but conversely is exposed to much more risk. To some degree, the franchisor may also choose to allot more management time - specifically, if that means collecting the rent from the franchisee to pay to the landlord or in handling reported concerns. A franchisee on a head lease will usually find fault with leasing issues directly to the landlord. A subtenant, on the other hand, will often complain directly to the franchisor that holds the head lease.
Franchisors often carry more weight with landlords and can negotiate favorable amounts of landlord's work, leasehold improvement allowance, free rent, no deposit, and so on with the landlord. Note that not all franchisors will pass these benefits on to the franchisee. One franchisor that used me to secure a head lease for him was very appreciative that we achieved eight months of free rent plus a substantial tenant allowance as part of the lease deal. In this case however, the franchisor offered the space to the franchisee through a sublease agreement providing the franchisee with only three months of free rent and no tenant allowance. The franchisor pocketed the incentives and savings while the franchisee remained none the wiser.
I'm not writing this article to pass judgment on what is right or wrong. As I lecture at franchise shows and multi-unit franchise conferences across the country, I am meeting with franchisors and noticing that many of them are not committing to head leases. Some franchisors are trending toward assuming less risk by letting their franchisees control the location and the real estate.
The main reasons that franchisors would have for being on the head lease would be to protect themselves and position them to re-open or resell that location and franchise if the existing franchisee closes. I have seen franchisors make a tremendous windfall by repackaging a failed franchisee location and reselling the entire business - including equipment and leasehold improvements - to another franchisee that is not aware of the property's history.
Furthermore, if the franchisee tries to break away from his or her name or franchise system, the franchisor can control the real estate and stay in charge of the site so that the franchisee does not turn into a competitor or so that another copycat business doesn't open up in that location.
Nothing stops a franchisor from using both methods. To clarify, a franchisor could take on some head leases for certain locations but let franchisees sign their own lease on other or perhaps borderline locations. One thing is for certain, if the franchisee is signing the lease agreement directly with the landlord then the franchisor needs to ensure that the franchisor has certain rights specified in the lease agreement.
These could include any of the following:
- Franchisor notification if the franchisee tenant is in default
- The first right to take an assignment of the lease agreement
- Prevention of a name change to the location in case the franchisee tries to break away and run a competing business on his or her own
This article does not provide enough space to examine all of the pros and cons of head leases, subleases, and franchisee direct leases but, at least, the topic is now on the table. If you need to discuss your situation or have any questions about commercial and retail leases, please don't hesitate to contact me.
Dale Willerton is The Lease Coach and a Senior Commercial Lease Consultant who works exclusively for tenants. Dale is a professional speaker and author of Negotiate Your Franchise Lease or Renewal. Got a leasing question? Need help with your new lease or renewal? Call Dale at 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com / www.HelpULeaseFranchise.com.