- A franchise agreement can be caught by the Retail & Commercial Leases Act (“Act”)
In order for an Agreement to be a “retail shop lease” it must:
1.1 Be “for value”- that is, the payment of rent or a fee is essential;
1.2 Grant or agree to grant a right to occupy a “retail shop”;
1.3 The right of occupation must be for “carrying on a business” – the implication being that premises used wholly for charitable or non-business purposes are excluded.
This may include a franchise arrangement, where the franchisor has leased premises and through the franchise agreement or a separate agreement grants to the franchisee a licence to occupy those premises. If the franchise arrangement meets this criteria they are required to be a retail shop lease subject to the provisions of the Act.
It is to be noted that a lessor holding the headlease with a franchisor instead of with the franchisee means the lessor will have no contractual relationship with the franchisee and will target the franchisor lessee for overdue rent, irrespective of what recourse the franchisor may have to the franchisee. This is an important point to remember for lessors and franchisors alike.
2. Sale of a Franchised Business – lease/franchise term
What can often be overlooked is the length of the term remaining on the lease and/or franchise agreement and what is often assumed is that a new lease will be secured upon expiry of the current term. Never assume that a new lease will be offered by the lessor.
The lessor is under no obligation to renew a lease except where there is a right to renew the lease pursuant to the agreed terms of the lease. Even if the lessor were to offer a renewal of the current location, the terms may be very different to those in the current lease. It is not uncommon for lessors to request rental increases if offer a new lease/renewal.
3. When is a retail lease actually entered into?
A retail shop lease is taken to have been entered into when:
3.1 Both parties have executed the lease; or
3.2 A person enters into possession of the retail shop as lessee under the lease; or
3.3 A person begins to pay rent as lessee under the lease or proposed lease (this does
not include a payment in advance or rent made to secure the premises).
It is therefore recommended to include a clause in the agreement to lease which provides that the lessee will sign the draft lease (also attached) in due course and that the agreement to lease is intended to, and shall be, immediately binding on the parties.
It is also recommended that possession of the premises should not be granted by the lessor or accepted by the lessee unless and until a formal lease has been prepared and signed. This is particularly important for the lessor as the majority of the clauses in a lease are in favour of the lessor and the lessor should have the benefit of them before possession is granted.
4. Lease Documentation
Section 16 of the Act indicates that if a lease is to be registered, the lessor must lodge the lease for registration within one month after the lease is returned to the lessor/lessor’s agent/lawyer.
If the lease is not to be registered, the lessor must provide the lessee with an executed copy of the stamped lease within one month after the lease is returned to the lessor/lessor’s agent/lawyer.
5. Rights of preference in a retail shopping centre
Section 20D(3) of the Act sets out when a lessor is not obliged to prefer an existing lessee when considering to re-let the premises:
5.1 the lessor reasonably wants to change the lessee mix in the retail shopping centre; or
5.2 the existing lessee has been guilty of a substantial breach or persistent breaches of
the lease; or
5.3 the lessor requires vacant possession of the premises for the purposes of demolition
or substantial repairs or renovation; or
5.4 the lessor:
5.4.1 does not propose to re-let the premises within a period (the relevant period) of at least 6 months from the end of the term; and
5.4.2 requires vacant possession of the premises for the lessor’s own purposes during the relevant period (but not for the purpose of carrying on a business of the same kind as the business carried on by the lessee); or
5.5 the renewal or extension of the lease would substantially disadvantage the lessor; or
5.6 the lessee’s right of preference is, in the circumstances of the case, excluded by
regulation.
On a practical level, it is prudent that lessors keep good written records of all breaches of the lease by the lessee including breaches of minor provisions from the commencement of the lease.
This will put the lessor in a much better position should they wish to later rely upon Section 20D(3)(b) to avoid preferring the existing lessee when the lease comes up for renewal.
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