Newsletter December 2013: In an economic environment where some retail brands are attempting to buck the trend and grow, a preferred route can be sourcing a lead franchisor and then in turn franchisees, rather than utilising precious capital to expand.
Whilst franchising offers many benefits to tenants, landlords need to be careful of lease structures adopted. If a protected tenant sublets to a franchisee using an excluded tenancy this protects the landlord, but results in the tenant losing its own rights of renewal under the 1954 Act as the tenant will not be in occupation. Tenants will therefore often suggest alternative structures such as a less formal licence or concession agreement, but the danger here is that such an arrangement may ultimately lead to the franchisee obtaining security of tenure if the arrangement is deemed to be a lease.
Another way is for a joint tenancy between the tenant and franchisee to be granted where they hold the lease together. This has the advantage that the landlord will have a direct relationship with both the tenant and the franchisee, but it also creates renewal rights for both the tenant and the franchisee. Those rights though will need to be exercised jointly, meaning the landlord retains the benefit of both covenants.
If your tenant is entering into a franchise arrangement or requests consent to share occupation, landlords should be careful to ensure it is done in a way that protects their position.
The franchisor will usually charge the franchisee between 105-110% of the headline rent. What are the implications when acting on an open market letting and the physical tenant is paying an inflated rent? Or should this artificial rent become the OMRV for the unit?
At Gilbert Evans we act for landlords, retail brands, franchisors and franchisees so we are able to view transactions from each perspective and advise on a mutually agreeable end solution. There are very few practices that are able to give such rounded advice.
Gilbert Evans is currently working closely with the British Franchise Association. We aim to support the association’s extensive nationwide membership through the provision of straightforward solutions to property matters.
To find out more about the best structure for leasing retail property, please contact Clive Snashall