As most franchisors are aware, the location a franchisee proposes to open and operate a franchise unit has the potential to produce a boom in sales but can also cause the franchisor-franchisee relationship to be a professional and financial blunder. In most instances when a franchisor grants a franchisee the right to open and operate a franchise unit in a particular location, the franchisor will not have an ownership interest in the real property on which the franchise unit is to be situated. This generally happens for two reasons: most franchisors are financially incapable of buying ownership interests in real property for multiple franchise locations, and for those who are financially sound, these franchisors decline to do so because of the liability that attaches to such interest.
As a result, most franchisors elect not to purchase an ownership interest in the property on which its franchise locations are situated; but rather, they elect to include a franchise lease addendum to the lease entered between the franchisee and the owner, or landlord, of the property on which the franchise location operates. If you are looking to open a franchise unit in North Carolina, our team of dedicated attorneys could explain what a franchise lease addendum is and why it may be necessary in your situation.
A franchise lease addendum is a common way that a franchisor can tackle the issue of location control, without subjecting itself to the liabilities associated with owning real property. It generally takes the form of an additional agreement that is attached to the lease between the franchisee and the property owner, or it is sometimes a provision contained in the terms of the lease itself. In North Carolina, a franchise lease addendum may be necessary because it grants a franchisor the right to take over the lease between the franchisee and the property owner in the event that the franchisee defaults, the agreement is terminated, or if the property owner lawfully terminates the lease; provided, however, that the property owner agrees to the terms of the franchise lease addendum, and the franchise lease addendum contains specific language stating that its terms prevail over any contrary terms in the lease itself.
In all of these situations, a franchisor may suffer economic loss at no fault of its own and based solely on the conduct of the property owner or the franchisee. If the franchisee is unable to operate the franchise on the property, the franchisor may well lose a source of income that it has come to rely on, which, based on the franchisor’s financial condition, may ultimately be detrimental to the franchise system itself. Therefore, a franchise lease addendum is a valuable way for a franchisor to ensure stable continuity of the franchise system.
For these reasons, a franchisor who is incapable or uninterested in securing an ownership interest in the property on which its franchise units will be located, should discuss with its franchise attorney the potential advantages and disadvantages to including a franchise lease addendum and why it may be necessary. A franchisor should seek the inclusion of a franchise lease addendum by directly negotiating it with the property owner and should consult its attorney to determine how this addendum can be structured to best meet the franchisor’s needs and concerns.