Subletting in franchising: how to structure it before expanding

When turning a business into a franchise, an owner may decide to lease premises for future outlets and sublet them to franchisees. This structure maintains a direct relationship with the landlord, but it also creates obligations that do not disappear when an outlet runs into difficulties. Before adopting it, you need to organise contracts, costs and responsibilities. In franchising, the soundness of this approach depends on transparency and compatible commitments across all parties.

1. Understand the role the franchisor will take on

Under a subletting arrangement, the franchisor is the landlord’s tenant and the franchisee’s sublandlord. These are separate relationships: one governs the franchisor’s use of the premises; the other allows the franchisee to occupy them on the agreed terms.

This means that a franchisee’s late payment does not remove the franchisor’s obligation to pay the landlord. Likewise, ending the franchise does not automatically terminate the head lease.

Before offering this arrangement, compare two alternatives: the franchisee leasing the premises directly, or the franchisor taking on the lease and subletting them. The second option needs a clear rationale, such as a strategy to maintain a presence at that location, as well as the financial capacity to cover periods when the premises are vacant.

Prepare a financial projection covering rent, other charges, security requirements, maintenance allocated to the tenant and any costs of vacating the premises. Do not treat the difference between the rent received and the rent paid as uncommitted income: it may come with significant costs and risks.

2. Check consent and franchise-specific rules

In Brazil, this arrangement falls under both Law No. 13,966/2019, the Franchise Law, and Law No. 8,245/1991, the Tenancy Law, alongside other rules applicable to contracts.

The Tenancy Law requires the landlord’s prior written consent to subletting. Agreeing the use of the premises with a prospective franchisee is therefore not enough: the franchisor must check whether the landlord has authorised the proposed structure and what conditions apply.

The Franchise Law contains a specific rule on subletting commercial premises. Article 3 allows the rent paid by the franchisee to the franchisor to exceed the amount the franchisor pays the landlord, provided that:

• this possibility is expressly and clearly stated in the franchise disclosure document, known in Brazil as the Circular de Oferta de Franquia (COF), and in the agreement;
• the higher amount does not impose an excessive burden on the franchisee, preserving the economic and financial balance of the sublease throughout the franchise agreement’s term.

This permission does not give unrestricted freedom to add any margin. The structure should undergo legal and financial review, with a rationale and terms that the prospective franchisee can understand.

The same law provides that, in this situation, either party has standing to seek renewal of the lease, subject to the statutory requirements. Do not confuse this possibility with an automatic guarantee of continued occupation.

3. Align terms, rent adjustments and responsibilities

A common contractual problem is promising a franchisee a period of occupation that the head lease does not secure. Before signing, compare the terms of the head lease, the sublease and the franchise agreement side by side.

At a minimum, this review should answer the following questions:

• Will the premises be available throughout the planned operating period?
• How will adjustments and any reviews of the rent under the head lease be handled?
• Who will pay building service charges, taxes, insurance and repair costs under the contracts and applicable law?
• Who will approve alterations, and what will happen to any improvements?
• What happens if the head lease ends before the franchise agreement?
• How will the keys be returned and outstanding amounts calculated?

It is also important to define how periods between occupiers will be handled. If one franchisee leaves, costs may continue until another operator moves in. Replacement should not be presented as automatic: it depends on the agreements signed and the necessary consents.

Allocate responsibilities in writing, without creating obligations that conflict with the lease signed with the landlord.

4. Explain the costs and put controls in place

When offering the franchise, present the rent and other charges so that the prospective franchisee can understand the cost of occupying the premises. Explain the amounts, rent adjustment criteria, required security and responsibilities, ensuring consistency between the COF and the contracts.

The COF must be provided at least ten days before the franchise agreement or preliminary franchise agreement is signed, or before any fee is paid to the franchisor or a person or company connected with it. Do not use an advance charge to bypass this requirement.

Once the agreements are in place, keep separate records of payments to the landlord and receipts from the franchisee. Record due dates, proof of payment, rent adjustments and dates when renewal needs to be considered. Appoint someone to monitor these commitments.

In practice: only adopt subletting once you have obtained the necessary consent, checked that the costs are financially sustainable and aligned all three contracts. Retaining control of the location can be useful; taking on property obligations without this preparation can undermine expansion.