Exerting Power Over Your Franchise Lease

The value of your business, if you ever intend to sell it, depends to a large degree on the lease terms. Lease assignment clauses are the tools that landlords use to exercise an enormous amount of control over the value of the business, and by extension, over the franchisee.

Almost all leases require the permission of the landlord to assign the rights and responsibilities of the lease to someone else. At first glance, this clause might seem rather innocuous, but it’s not. Before you sign anything, make sure any lease assignment clause requires that the landlord automatically grant a full assignment to any fully qualified franchisee of the system.

Full assignment means release of all liabilities related to the performance of the lease. And while the landlord frequently reserves the right to charge you significant fees to go through the assignment process, it’s worth the added cost to fight for this condition.

Many leases specify that the lease is personal to the lessee, meaning that when you sell the business, all terms of the lease, including the rent, term, security deposit, and CAM charges, are up for re-negotiation with the landlord. That means, whereas you might have a favorable, low-rent payment that enables you to make good money, the lease is personal to you and you only. If you attempted to sell the business, the landlord could renegotiate completely different terms, substantially destroying the value of the business.

You must also be aware of the landlord’s ability to unreasonably deny an assignment. I had a client almost lose an $800,000 sale of his franchise because one of the landlords refused to assign the lease to the buyer, who was a fully qualified franchisee of the system. The buyer had a career and education in the same line of work as the franchise, and she qualified for a big SBA loan and was putting a lot of cash into the purchase price.

The landlord ultimately relented under the threat of legal action, but the seller is forced to live with his existing guarantee on the lease for the next 4 years. If that buyer fails, he will have to make lease payments that could wipe him out economically because he wouldn’t be able to take over the business.

Most assignments do not allow the original tenant (you) to be released from the obligation to pay the rent, even with an assignment to someone else. If your buyer stops paying rent for any reason, the landlord will come after you. Meanwhile, if the reason the rent isn’t being paid is because your buyer is mismanaging the business, you might not be able take over the business because you may no longer be a qualified franchisee after you have sold the business.

You must understand and acknowledge these very real risks. Most landlords will accumulate as much power as possible through the lease: they take the “-lord” part of their title very seriously. You have to be as aggressive when it comes to maintaining a reasonable level of power over the various clauses within your lease. Be sure that your lease assignment means you pass all liabilities related to that lease once you’ve sold your franchise to a qualified buyer. Better yet, have the franchisor sign the lease with the right to place whatever tenant they want to in the location.