Franchising and commercial leases: align your agreements before expanding

When turning an existing business into a franchise network, finding premises that resemble the original site is not enough. The franchise agreement and the lease must work together, even though they often involve different counterparties, durations and terms. Otherwise, the franchisee could be left paying rent without the right to use the concept, or holding a franchise agreement without usable premises. Make coordinating the agreements a task in its own right before expanding.

Decide who will lease the premises

Start with the division of responsibilities, not the address. Will the franchisee sign a lease directly with the property owner, or will your company lease the premises and sublet them? These models involve different financial commitments and levels of contractual oversight.

Under a direct lease, the franchisee is the landlord’s contractual counterparty. You may still need to approve the premises as suitable for the concept. In that case, distinguish between approval for the concept and an assessment of whether the lease is legally or financially suitable. Approving a shopfront does not mean the lease terms are reasonable.

If the franchisor leases the premises and sublets them, one of the points to check is the right to sublet. Do not assume that the franchise agreement itself grants that right. The franchisor may also remain liable to the property owner even if the franchisee stops paying or leaves the business.

Set out in writing who is responsible for:

• negotiating the rent and reviewing the lease terms,
• providing any security and funding alterations,
• obtaining the necessary consents from the landlord,
• bearing the costs if the planned opening does not go ahead.

Choose the model before presenting specific premises as a ready-to-go franchise opportunity.

Compare the agreements’ timelines

Create a shared timeline for the franchise agreement, lease and fit-out. Mark the handover date, start of building work, planned opening, contract periods and notice deadlines. The aim is not to make every date identical, but to ensure that any differences are deliberate and manageable.

A lease can start generating costs long before the business opens. Meanwhile, the franchise agreement’s term or fees may run from a different date. Decide what will happen if handover is delayed or the premises are not ready on schedule.

Useful checks include:

• Could either party become bound before the other necessary agreement is in place?
• What happens if the landlord does not approve the intended use of the premises?
• Who pays the rent if the fit-out is delayed?
• Is there a plan if the tenancy ends before the franchise agreement expires?

Where appropriate, agreements may need to be conditional on other requirements being met. Have a lawyer draft the conditions so that they specify what must happen, by when, and the consequences if approval is not obtained. A general proviso that ‘the premises must be approved’ leaves too many questions unanswered.

Allocate investment responsibilities and premises-related risks

Your existing business may have had alterations paid for by the landlord or built up its fixtures and fittings over several years. The first franchisee will not automatically have the same advantages. Separate the concept’s requirements for premises from the arrangements developed at the original outlet.

Draw up a project-specific allocation of responsibilities for items such as ventilation, electrical installations, fixed fittings, signage and reinstatement. State who commissions, pays for, owns and maintains each important element. Also check which works require the landlord’s approval.

A simple responsibility table should list the work required, the responsible party, any necessary approval, who bears the cost and the decision deadline. This makes it easier to identify gaps before anyone commissions work.

Be especially clear about what happens to investments when the premises are vacated. Fittings that are central to the concept may be expensive to move, have no value at another site or give rise to reinstatement costs. Avoid describing investment costs as recoverable without supporting evidence.

Keep the landlord’s requirements separate from the franchisor’s requirements, too. The franchisee needs to be able to see whether a cost arises from the premises, the concept or an optional extra they have chosen.

Check the legal position before making binding commitments

Sweden has no comprehensive franchise law, but the Act (2006:484) on Franchisors’ Duty to Disclose Information governs pre-contractual disclosure. The franchisor must provide clear, comprehensible written information about the agreement’s implications and relevant circumstances well before the franchise agreement is signed.

The disclosure requirements cover, among other things, financial terms and any goods or services that the franchisee is required to buy or rent. If your model requires particular premises or a letting arrangement with the franchisor, those arrangements therefore need to be clearly described in the relevant disclosures. A separate lease does not replace the duty to disclose information.

For commercial leases, the provisions of Chapter 12 of the Swedish Land Code, often referred to as the Tenancy Act, are central. The Swedish Contracts Act is also relevant. Commercial tenancy rules include provisions on termination notices and indirect security of tenure. Have a lawyer review these issues and the interaction between the agreements; do not assume that the franchise agreement’s terms also govern the relationship with the landlord.

Practical conclusion: Prepare a combined overview of the agreements, a timeline and a responsibility table for each new outlet. Proceed only once you know who bears the costs and risks associated with the premises, including if the opening is delayed or the franchise relationship ends.