Franchisor Addendums to Franchisee Leases Part 2: Ensuring Notice of Franchisee Lease Default
As we discussed in this previous post, franchisors regularly inject themselves into lease negotiations between their franchisees and potential landlords. They do so not only to help their franchisee obtain the best possible lease terms but also to protect themselves and their franchise if that franchisee fails to meet its obligations under the lease or the franchise agreement. That is why most franchisors require that a standard addendum be added to all franchisee leases that contains a clause that allows the franchisor to take an assignment of the lease in such circumstances, among other things. While the details of such clauses may differ, they all focus on giving the franchisor the right to step into the franchisee’s shoes in the event of default. But the franchisor won’t be able to exercise that right if they have no idea that their franchisee has, in fact, defaulted on their lease obligations.
All Parties Benefit When Franchisor Is Notified of a Lease Default
Accordingly, franchisors have a clear interest in knowing when or why a default leading to termination might arise. That is why franchisor lease addenda usually include notice requirements and provide the franchisor with additional rights beyond assuming the lease when their franchisee fails to meet their obligations.
Most franchisor lease addenda contain a requirement that the landlord provide the franchisor with notice of any defaults that occur under the terms of the lease. A franchisor may not have day-to-day knowledge of the operations of each of its franchisees and may not have the capacity to perform regular reviews. In such cases, the franchisor relies on landlord notices to advise of trouble because the franchisor will not always know if the franchisee is working within the terms of the lease agreement. Notice from the landlord of the franchisee’s default affords a franchisor the ability to address a breach of the lease while options are still available.
The landlord also benefits from this requirement by having a second party that stands ready to cure a breach of the lease (or, as discussed in the first post in this series, accept an assignment of the lease). From the landlord’s perspective, the more parties available to cure a potential default and pay rent, the better. Even if the default could not lead to immediate termination, a franchisor that receives multiple notices of default from the landlord will recognize that the franchisee needs assistance.
Challenges and Risks With Franchisor Notice Provisions
The notice requirement might appear simple in theory, but it may not be so easy in practice for many landlords. Initially, the landlord’s counsel must ensure that the landlord has the capacity to provide additional notice. Some landlords may be too small to have the administrative resources to provide an additional notice; quite simply, they may forget to even review lease addenda when considering notice requirements.
Furthermore, landlords who work from computerized lease abstracts instead of the full leases themselves may not have a system that allows for a second party to receive notice. If the computer program allows for it, the simplest way to address the notice issue may be to add the franchisor as a specified party to receive notice in the lease itself, rather than just in the addendum. This way, the obligation to provide notice to the franchisor is in plain sight.
Consistency Between Lease and Addendum Is Critical
If the landlord agrees to provide notice and the provision is left in the addendum rather than moved to the lease, the landlord’s counsel must consider another critical issue. The notice language should be consistent between the lease and the addendum. In many landlord form leases, a landlord does not have to provide notice in the event of a failure to pay rent. Landlords argue that tenants should be aware that rent is due at specified times and should not require a written reminder of this ongoing and unchanging obligation. There may even be other automatic defaults in the lease that also do not require notice from the landlord. If the landlord’s form lease does not require notice to its tenants, but the franchisor’s addendum requires notice of all defaults to the franchisor, the landlord may have unwittingly agreed to provide notice when none is regularly given.
As this discussion suggests, the landlord’s counsel must ensure that the landlord’s notice requirements, whatever they may be, are consistent between the lease and the addendum. A simple solution is for the landlord to agree to give the franchisor only those notices given to the franchisee, thus eliminating what may become a separate obligation with different terms. At a minimum, if the parties are negotiating the lease and addendum at the same time, the notice requirements, whatever they may be, can be drafted consistently and agreed to in both the lease and the addendum.