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One of the many decisions you must make as a franchisor is whether you will lease or license a franchise business location to a franchisee. A franchisee can enter into the lease directly with the landlord of the premises. Alternatively, you can enter into a lease with the landlord of the premises and license the premises to your franchisee. However, it would help if you considered the benefits and shortfalls of both arrangements. This article explains the key differences between leasing and licensing business premises in a franchise.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Exclusive Possession vs Occupation
Only a lease provides an individual with the legal right of exclusive possession. Exclusive possession means you have the right to exclude other persons from your leasing premises. This means you can exercise control over the property except when the landlord has a right to enter the premises, such as to complete repairs or inspections.
On the other hand, a licence does not grant exclusive possession. Instead, a licence only grants someone the right to occupy the premises.
Obligations as a Lessee vs Obligations as a Licensee
A lease typically grants much broader rights than a licence. This is because, under a lease, you have greater control of the property. While the obligations under a lease agreement might be extensive, you remain in possession of the property as long as you do not breach the lease.
In a typical licence agreement, the lease is annexed, and a clause is included whereby the licensee will abide by the terms of the lease. However, the licensor (the franchisor) remains primarily liable for compliance with the lease in favour of the landlord.
Continue reading this article below the formCertainty of Terms
Leases are typically long-term arrangements and must be for a fixed period. This means they need a start date and an end date. On the other hand, a licence can be for an uncertain period. For example, depending on the terms of the licence, either party could cancel the license by giving written notice.
In this sense, a lease gives both parties more security because the length of the arrangement is certain. However, a licence can be more flexible since its end date might not be fixed.
Changes in Ownership
Since a lease is a legal interest in land, it will survive a change in ownership. So, for example, if a landlord sells their commercial property while you are leasing the premises, the buyer must honour your tenancy.
On the other hand, a licence is a personal contract between the owner and licensee. As such, you cannot transfer it to another person. In practice, this means that if the licensor sells their property, the license will generally come to an end.
What If My Franchisee Directly Enters Into the Lease?
If your franchisees directly enter into the lease with the landlord of the premises, you will not be responsible for fulfilling any obligations under the lease. As a result, the franchisee will be liable for continuing to pay rent until the end of the lease term.
However, this also means you have less control over the business premises. Therefore, if a franchisee decides to exit the franchise network, you will not have control of the site since you are not the leaseholder. Instead, the franchisee could rebrand and continue to trade from the premises.
What If I Hold the Lease and License the Premises to My Franchisee?
In this instance, you will assume all liability under the lease agreement. Although you will pass your lease obligations on to the franchisee through the licence, the landlord ultimately has no direct contract with the occupying franchisee. As a result, if your franchisee continuously fails to pay rent, you will be responsible for the late payments.
However, by entering into the lease directly with the landlord, you retain absolute control over the lease of the premises. Consequently, you have greater control when:
- negotiating the lease terms;
- controlling rent payments; and
- organising the fit-out of the premises.
If the franchise agreement terminates, you will also be able to evict the franchisee since you are the leaseholder of the premises. Additionally, you will retain the right to occupy the premises as the lessee. This can make installing another franchisee in the franchise network much more manageable with minimal business disruption.
Key Takeaways
If your franchisee holds the lease to the business premises, you will not be responsible for fulfilling any obligations under the lease. Alternatively, if you enter into the lease agreement and subsequently license the occupation of the premises to the franchisee, you will assume all liability under the lease agreement. However, you will retain greater control over the business premises.
If you have questions about leasing and licensing business premises, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0800 005 570 or visit our membership page.
Frequently Asked Questions
A licence agreement is a contract where a licensor (the property owner) gives someone permission to enter the land or premises and use these premises for some stated purpose.
Exclusive possession means the right to exclude other persons from the premises you own or are leasing.
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