Selling a Franchise With a Lease: What to Read Before a Buyer Asks

Selling a Franchise With a Lease: What to Read Before a Buyer Asks

You own a franchise that operates from leased space, and a buyer is about to ask whether the lease comes with it. Selling a franchise with a lease starts with three documents, not one rule: your lease, your franchise agreement, and what your franchisor's Franchise Disclosure Document says about transfer. The federal franchise rule says nothing about a lease in a franchisee's sale, so your own papers are where to start. This article shows where to look.

Does federal franchise law say what happens to my lease when I sell?

No. The FTC Franchise Rule, 16 CFR Part 436, is a disclosure rule for franchisors, and it says nothing about a lease in a sale from one franchisee to a buyer. It says nothing about a landlord's consent either.

The FTC's Franchise Rule page lists the Rule as 16 CFR Parts 436 and 437. Leases do appear in the Franchise Disclosure Document, in several items. Two of them are these.

• Item 7 counts real property, whether purchased or leased, in the franchisor's estimate of the initial investment.
• Item 11 covers the help a franchisor gives before opening, including "Locating a site and negotiating the purchase or lease of the site" and "Whether the franchisor generally owns the premises and leases it to the franchisee."

Both describe what a franchisor discloses to a person it is selling a franchise to. Neither says those rights pass to a buyer in your sale. Item 17, the table on renewal, termination, transfer and dispute resolution, has no row for a lease or premises.

Does my franchisor get a say over my lease or site when I sell?

The Rule does not answer that. Your franchise agreement, and any rider attached to your lease, are where a franchisor's say would be written.

The Rule defines a "sale of a franchise" and says it "also does not include the transfer of a franchise by an existing franchisee" "where the franchisor has had no significant involvement with the prospective transferee." It adds that "A franchisor's approval or disapproval of a transfer alone is not deemed to be significant involvement." (16 CFR 436.1.) The Rule does not set the approval itself. Your agreement does.

That is why Item 17 is useful to you. It requires the franchisor to list, with the section of the agreement, the provisions on:

• franchisor approval of a transfer by the franchisee,
• the conditions for that approval,
• the franchisor's right of first refusal to acquire the franchisee's business, and
• the franchisor's option to purchase the franchisee's business.

Those are row labels in 16 CFR 436.5, paragraph (q), and the rows point you to sections of your agreement. None of them mentions a lease. Whether your franchisor treats your site or lease as part of the conditions is something only your agreement and your franchisor can tell you, so ask in writing.

What is a lease rider, and why does it matter when I sell?

A lease rider is an addition attached to the lease, and some franchisors use one to set out their rights over the lease. If you have one, read it before a buyer does.

One practitioner's view helps here, though it is not law. Matthew Brandt of the law firm Greenberg Traurig wrote in an International Franchise Association article posted March 9, 2017, that "Many franchisors prefer to address assignment rights through a lease rider which is often attached to the lease." He describes a collateral assignment, in which "the franchisee assigns its rights under the lease to the franchisor," so the franchisor can step into the franchisee's place if the franchisee defaults under the lease. He also recommends lease language so that "the lease may be assigned to either the franchisor or another franchisee without the prior consent of the landlord."

Read that with care. It is nine years old, it is advice to franchisors on what to negotiate, and it describes how some leases are built. It does not tell you what happens in your sale, or whether your lease has any of these terms. It is a reason to check whether yours does.

Is assigning a lease the same as subletting it?

No. Cornell's Wex legal dictionary gives the difference in a landlord and tenant setting. Under an assignment the tenant gives "the entire balance of the term" to the new party "with no reversion to anyone." Under a sublease the tenant gives "the balance" to the new party "for a limited period of the remaining term." Wex adds that with an assignment the new party "would have privity of estate with the landlord, while under a sublease" it "would not."

That is a general definition, not a rule on landlord consent. It helps you read the words in your own lease, because the two are different things. Which one your lease allows, and what the landlord must agree to, is written in the lease.

What can I not find out without my own documents?

Several things a buyer may ask, and each depends on your own documents and deal.

• Whether your landlord must agree to a transfer, and on what standard. Your lease sets this, and state law may matter too.
• Whether the original tenant stays responsible after a transfer, and whether anyone who guaranteed the lease does. Your lease and your attorney settle this.
• How long a landlord or franchisor takes, and what either charges. Both vary from one landlord and franchisor to the next.
• Whether a lease counts in the price or is a condition of closing. That is for you, your buyer and your attorneys.

How a lease bears on what a buyer will pay is a valuation question. Expect one question in particular: a buyer taking over a franchise that runs from a leased site will want to know how long the premises stay available to them and on what terms. Have the answer ready.

What should I read and ask before I list a franchise with a lease?

Five steps, all within your control:

1. Read your lease. Find the sections on transfer, assignment and subletting, any rider attached to it, and the years left on the term.
2. Read the sections of your franchise agreement that Item 17 of your franchisor's Franchise Disclosure Document points to for transfer approval and its conditions.
3. Ask your franchisor in writing whether it has a say in the lease or the site when a buyer takes over, and whether it is a party to any rider.
4. Find out when the landlord needs to be told. Confidentiality is available throughout, and your lease and franchise agreement may set who must be told and when. Take that question to a franchise attorney.
5. Get a current number before you speak to a buyer.

A free Opinion of Value is that number, and it commits you to nothing. It is a personal valuation page with a custom video walkthrough recorded by a senior advisor, free and with no card on file. Request your free Opinion of Value and tell us the location is leased.

If you decide to sell, we help with buyer screening, due diligence and offer negotiation, franchisor approval, paperwork and closing steps. Our sell a franchise page shows how we work with owners, and how a franchise sale runs walks through the order of the steps. This article is general information, not legal or tax advice. Your lease and your franchise agreement set your terms, so ask a franchise attorney about them, and a CPA about your taxes.

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