Mastering the Franchisor Addendum

Just when you thought you had finished negotiating the lease for a franchised location, you are presented with the franchisor addendum. While it can feel like an unexpected hurdle, it is best to encounter this early in the process so it can be negotiated along with the lease.

Here’s what you need to know about franchisor addenda and how to navigate them effectively to appeal to prospective commercial tenants.

What Is a Franchisor Addendum?

A franchisor addendum is a supplementary agreement required by most franchise systems to protect their interests. The franchisor addendum usually addresses four main topics:

1. Lease Assignment Rights: Franchisors often require the ability to assume the lease if the franchisee defaults. The fact that the landlord will step in and continue to operate the premises and pay rent if the tenant fails is generally beneficial to a landlord. The rub comes into play on whether the franchisor should have the unfettered right to further assign without the landlord creating some criteria. While this can ensure continuity of use, criteria should be established for any future assignments to maintain control over the tenant mix.
2. Franchisor Premises Access: This provision allows the franchisor to access the premises, often to “de-identify” the space if the franchise relationship ends. When structured with clear guidelines and timeframes, this can benefit the landlord.
3. Notice and Cure Rights: Franchisors typically request notification of lease defaults and an opportunity to cure them before a landlord takes action. Provided the time frames for cure run concurrently with that of the tenant or not much longer, most landlords will agree to this provision.
4. Subordination of Lien Rights: Franchise agreements often involve leased equipment or property owned by the franchisor. Subordinating the landlord’s lien to these assets facilitates the franchise operation while safeguarding the landlord’s primary financial interests.

Although these provisions may seem intimidating at first glance, they can offer many advantages. Ultimately, franchisor addenda are an inevitable part of leasing to franchisees. However, if properly negotiated and structured, commercial landlords can position themselves as franchise-friendly while safeguarding their property interests.