How to align franchise agreements with head leases and subleases

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Why alignment matters

A franchised site usually sits on three documents: a head lease between the landlord and the franchisor, a sublease from the franchisor to the franchisee, and the franchise agreement itself. Each has its own term, options and termination rights. When the three are signed at different times, the dates drift, and the person at the end of the chain carries the risk.

The simple principle is that nobody should be committed for longer than the right they depend on. The franchisee should not be bound to trade past the end of the sublease, and the sublease should not outlast the head lease.

Six ways the terms drift apart

1. Term lengths. A ten year franchise agreement signed against a head lease with six years left.
2. Options that do not match. The franchisee has a renewal right but the sublease has no option, or the head lease option is held by the franchisor only.
3. Renewal conditions. The franchise agreement lets the franchisee renew if conditions are met; the head lease option needs notice the franchisee never hears about.
4. Assignment and step-in rights. A franchise transfer needs landlord consent under the head lease, but the franchise agreement promises a transfer on terms the landlord has not agreed.
5. Termination triggers. Ending the franchise agreement does not end the sublease, or the reverse, leaving a franchisee without a business or a premises.
6. Make-good and refit. Reinstatement obligations at the end of the head lease land on a franchisee who was never told.

Disclosure and premises

Franchisors have disclosure obligations to prospective franchisees under the Franchising Code of Conduct, and the premises arrangements are part of what a franchisee needs to understand before signing. Ask your franchise lawyer to confirm what the current Code requires you to disclose about the lease and the term of the right to occupy, and to check the franchise agreement against it. We have not reviewed this page with a lawyer yet; treat it as a checklist for that conversation.

A checklist for each new site

• Head lease: start, end, options (who holds them, notice window)
• Sublease: start, end, options, and that it ends on or before the head lease
• Franchise agreement: start, end, renewal rights
• Every end date nests: franchise agreement, then sublease, then head lease
• Options on each document match the others, with the same notice windows
• Landlord consent to the sublease and to a franchise transfer is on file
• Termination triggers are consistent across the three documents
• Make-good and refit obligations are known to the franchisee
• Key dates diarised for the right person, with a backup
• Review the alignment again whenever any one document is varied or renewed

Doing this across a network

One site is a ten minute exercise. Two hundred sites, each with a different landlord and a different signing history, is why spreadsheets fail. Tenuta IQ models the head lease, sublease and franchise agreement as one site, runs the check continuously, and warns when a variation breaks the alignment.