Subletting franchise premises: what to check before you buy

When a franchisor offers the premises where your outlet will operate, you need to assess two separate relationships: the franchise arrangement and your right to occupy the property. The convenience of having a location already secured does not remove contractual risks. For anyone investing in a franchise in Brazil, understanding the sublease beforehand helps avoid a situation where the outlet’s future depends on conditions you knew nothing about.

1. Understand who controls the property

Under a sublease, the franchisor rents the property from its owner and grants the franchisee the right to use it under a separate agreement. Checking only the document you will sign is therefore not enough: the head lease also affects the security of your business.

Ask for a copy of the head lease, any amendments and the documentation authorising the subletting. Brazil’s Law No. 8,245/1991, known as the Tenancy Law, requires the landlord’s prior written consent to sublet. Do not assume that approval from the franchise brand or receipt of the keys replaces this consent.

In particular, check:

• Who is named as the landlord, tenant and subtenant.
• Which property is described and which areas you may use.
• Whether the franchise’s business activity is compatible with the permitted use under the lease.
• What restrictions apply to alterations, the shopfront and installations.
• Whether any amendments change the amounts payable, contract terms or responsibilities.

The sublease depends on the head lease. Under the Tenancy Law, when the head lease ends or is terminated, any subleases also end, with the subtenant retaining the right to claim compensation from the sublandlord. This potential right to compensation is not a guarantee that you can remain at the premises.

2. Check the charges and the transparency required by law

Law No. 13,966/2019, Brazil’s current Franchise Law, expressly addresses the subletting of commercial premises. Article 3 allows the rent paid by the franchisee to the franchisor to exceed the rent the franchisor pays to the property owner, but sets conditions.

This possibility must be stated expressly and clearly in both the Franchise Disclosure Document, known in Brazil as the COF, and the agreement. In addition, the extra amount must not impose an excessive financial burden on the franchisee, and the economic and financial balance of the sublease must be maintained throughout the franchise agreement.

This does not establish a universal maximum percentage, nor does it mean that any difference is automatically acceptable. Ask for the figures and terms needed to understand the charges, and take any questions to a lawyer experienced in franchising and commercial leases.

Article 2 of the same law requires the COF to provide clear information about recurring fees and other amounts payable to the franchisor or third parties it designates, including rent for commercial premises, together with their calculation basis and purpose.

Draw up a comparison separating out:

• Rent under the head lease and rent under the sublease.
• Rent adjustment indices and review dates for each agreement.
• Building service charges, taxes and other charges allocated to the outlet.
• Required security or guarantees and the conditions for their release.

Do not assume that a rent-free period granted by the property owner will automatically be passed on to the franchisee. Ask how it will be treated and have the answer recorded in the relevant documents.

3. Compare contract terms and renewal rights

Compare the start and end dates of the franchise agreement, head lease and sublease side by side. If your right to occupy the premises expires before the franchise agreement does, your investment could be at risk even if the outlet is meeting its obligations to the brand.

Article 3 of the Franchise Law provides that, when the franchisor sublets the premises to the franchisee, either party has legal standing to seek renewal of the lease. The law also prevents lease and sublease agreements from excluding that standing, except in cases of default specified in those agreements or in the franchise agreement.

The right to seek renewal does not mean automatic renewal. A court action for lease renewal is subject to the requirements and deadlines set out in the Tenancy Law. A lawyer should check whether these are met and draw up the necessary timetable.

Ask who will monitor expiry dates, who will negotiate with the property owner and how relevant notices will be shared. An informal promise that “the franchise network handles that” is no substitute for clearly defined responsibilities.

4. Negotiate protection against problems with the head lease

Before you buy, clarify what will happen if the franchisor stops paying the property owner, receives an eviction notice or decides not to continue renting the premises.

Request clauses covering notification of payment defaults, access to proof of payment and notice of changes to the head lease. Also agree who will bear the costs of relocation, alterations and business interruption, taking account of the cause of the problem and what the parties negotiate.

These contractual protections need to be negotiated; they are not all automatic rights under the Franchise Law. Nor will an obligation undertaken by the franchisor necessarily bind the property owner if the owner was not party to that arrangement.

Before you decide: gather the COF, franchise agreement, head lease, consent to sublet and sublease. Only proceed once you understand how much you will pay, how long you can occupy the premises and what options you will have if the head lease runs into trouble.