This article by Tom Spadea was featured in the September 2024 issue of Franchise Dictionary Magazine.
Control Your Real Estate
For franchisors with physical locations, understanding the importance of obtaining a fully executed conditional assignment of lease for every site is crucial.
For new franchisors who may be unaware, a conditional assignment of lease is an agreement between the franchisee and the landlord of each location, for the franchisor’s benefit. The agreement allows you, the franchisor (or new franchisee whom you designate) to step into the lease in the event of the termination of either the lease or the franchise agreement. This option gives the franchisor the ability to retain a valuable location if necessary.
Units fail for many reasons, often it’s just a bad location that should be let go. Sometimes, however it’s a bad operator who is perhaps undercapitalized, distracted or just simply not suited to running a business. If the franchisor has a well drafted and fully executed conditional assignment of lease, then the franchisor can take back the location and/or assign it to a new operator without having the landlord or the exiting franchisee block it. The agreement also should contain a notice provision, requiring the landlord to notify you if the franchisee is late on rent, so you can be prepared to step in once the problem escalates.
If it is not part of your real estate approval process, this document often gets overlooked. It should be a form attached as a schedule or exhibit to your franchise agreement, but since it is not executed with the franchise agreement, many times franchisors will forget about it until they have a failing location that they want to save.
By including the form in the franchise agreement, the franchisee already has agreed that the franchisor will not approve a location without this document being executed by both the franchisee and the landlord. But just because it’s agreed upon doesn’t mean it will happen without active oversight from the franchisor. We recommend making this part of the franchisor’s real estate approval process. If a landlord refuses to sign it, the franchisor has the right to reject the location.
Even if you never want to take over a location, the other time this issue also arises, is during due diligence when a franchisor is preparing to sell their system to private equity. Private equity firms will want to see these agreements in place for every location for the same reasons outlined above. Maintaining control of your real estate without the balance sheet risks of co-signing a lease is a significant advantage in the franchising model. Don’t let this document reduce your enterprise value by dismissing it as mere paperwork that your lawyers are nagging you to sign. We’re persistent because we want these agreements in your future deal room to maximize the generational wealth you set out to build.
To see all of Tom’s featured articles on The Franchise Dictionary Magazine, visit this page.