Buying a franchise: review the premises lease before you commit

The premises can determine whether your franchise opens as planned. Yet the lease is often treated as a practical detail to sort out after choosing a brand. A franchise network brings together independent business owners, but the franchisor’s approval of a location is no substitute for your own due diligence. Before committing, you need to know who holds the lease, what the premises may be used for and which costs your business will actually take on.

1. Establish who gives you the right to occupy the premises

Start by mapping out the chain of agreements. Will your business rent directly from the property owner, sublet from the franchisor or take over an existing franchisee’s lease? Each arrangement creates different dependencies and needs to be reviewed separately.

With a direct lease, your business has its own relationship with the landlord. The franchisor may still require approval of the premises or insist on certain terms being included in the lease. Ask for these requirements in writing before completing negotiations with the landlord.

If you are subletting, check that the subletting is permitted and that the head lease allows your planned business activities. Request the relevant sections of the head lease, along with evidence that any necessary consent or authorisation is in place. Also ask what happens to your business if the franchisor’s tenancy ends.

In particular, check:

• Which company is named as the tenant, and which company will pay the rent?
• Which areas, storage facilities, entrances and shared spaces are included?
• Do you have adequate rights to use loading bays, ventilation systems and other essential installations?
• Does taking over the lease require the landlord’s involvement or another form of legal approval?

Do not assume that buying the business automatically gives you the right to occupy the premises. That right must be established separately.

2. Check the permitted use before ordering fixtures and fittings

An attractive location is only useful if both the lease and regulatory requirements allow you to operate your concept. The permitted use described in the lease should match the activities you will actually carry out. A general reference to retail use, for example, may not cover every aspect of food preparation, serving food or other activities.

Ask the landlord to provide details of the premises and their suitability. Then check with the local municipality which requirements apply to your intended use. Depending on the business, you may need a building permit for a change of use, to notify the municipality of certain works, or to obtain specific permits and registrations. The franchisor’s approval to open is not approval from a public authority.

Consider inspecting the premises together with a technical adviser. Check electrical capacity, ventilation, accessibility, fire safety and whether you can install signage. Establish which shortcomings the landlord must address and which are your business’s responsibility.

Then document the division of responsibilities, specifying each task, who pays, the deadline and how the work will be signed off. Wording such as “the premises will be adapted for the business” is too vague if the parties later disagree about what those adaptations include.

3. Align the lease, opening date and franchise agreement

Compare the lease timeline with the franchise agreement. Mark the handover date, rent commencement date, planned opening, agreement term and deadline for giving notice. Mismatches can leave you liable for payments before the business generates any revenue, or committed to premises on terms that do not align with your right to operate the concept.

Negotiate how delays will be handled. If the landlord’s works are not complete by the handover date, the lease needs to state clearly what happens next. If a necessary permit is missing, do not assume you can simply withdraw from the agreement. Ask a lawyer to draft any conditions relating to permits, finance and the franchisor’s approval, with clear deadlines.

Also calculate the full cost of occupying the premises. In addition to the base rent, the lease may include index-linked increases, turnover rent, a property tax surcharge, operating costs and maintenance obligations. Check which amounts exclude VAT and how VAT will affect your business’s cash flow.

Request itemised supporting information for additional charges. For each item, you should be able to answer three questions: how is it calculated, when is it payable and can you verify the calculation? Ask your accountant to include these payments in your cash-flow forecast, along with the deposit and any costs incurred before opening.

4. Understand what protection the law actually provides

Sweden has a specific Act on Franchisors’ Duty to Provide Information (2006:484). It requires the franchisor to provide clear, understandable written information well before the franchise agreement is entered into. This must include fees and other financial terms of the franchise business. If the premises arrangement forms part of the offer, you need to understand how it affects those terms.

However, the Act does not provide comprehensive protection covering every aspect of the franchise relationship, nor does it replace a review of the lease. General contract law also applies. Key rules on commercial tenancies are set out in Chapter 12 of the Swedish Land Code, often referred to as the Tenancy Act.

Commercial tenants may, in certain circumstances, have indirect security of tenure. This does not mean an unconditional right to remain in the premises, but may, among other things, provide a right to compensation when the tenancy ends. There are exceptions to this protection, and it can be waived in certain circumstances. Have a lawyer review any proposed waiver and keep track of the relevant deadlines.

Practical takeaway: Do not sign until your right to occupy the premises, the permitted use, total costs and timetable are documented. Review the lease and franchise agreement together—not as two separate purchases.