Advantages and Disadvantages of Subleasing/Licensing

The Advantages 

It’s all about control

• The franchisor has a direct contractual relationship with the landlord.
• The franchisor retains control over the premises (over the franchisee sublessee/licensee).
• No risk of franchisee tenant terminating or varying the lease without the consent of the Franchisor.
• Franchisor can terminate tenancy and take over premises or sublease/licence to a different franchisee – easier than forcing landlord/tenant to assign lease to you.
• Harder for the franchisee to “walk away” from Franchise Agreement if franchisor controls the site.

The Disadvantages 

• You are primarily liable – the landlord will expect you to comply with the tenant’s obligations under the lease.
• Follow up – because are the tenant, you will need to follow up to ensure the franchisee complies with the Tenant’s obligations under the lease.
• Director’s liability – directors of the Tenant entity need to be aware of their liability for reckless trading – i.e. agreeing or allowing the business to be carried on in a manner likely to sustained risk of serious loss to the creditors (e.g. allowing termination of a sublease).
• If franchisee absconds – you are left with the tenant’s obligations.
• If the tenant entity has entered into more than one lease and doesn’t have funds to pay any amounts due under a lease – there could be a “knock-on” effect if the tenant is put in liquidation.

Tips

• We recommend a licence over a sublease.
• Make sure your sublease/licence contains the right terms and conditions – for instance a breach of the Franchise Agreement should be a breach of the sublease/licence and vice versa.
• The term should be expressed to automatically end if the franchise agreement is terminated.
• Take an active role in administration of the lease, keep abreast of rental payments, follow up rent arrears promptly – issue PLA notices
• Consider forming a separate company to hold each lease and guarantees and bank guarantees to be provided by the Franchisee.
• Prior to entering into any ATL or lease the directors of the tenant should satisfy themselves that the company has the means to meet the commitments under the lease.

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Important: This information is provided as a guide only and is not intended to be legal advice.  You are strongly recommended to consult the services of an experienced lawyer.
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