Franchisor Addendums to Franchisee Leases Part 3: Franchisor’s Right To Cure Tenant Defaults
Fixing a problem requires, at minimum, two things: 1) knowledge that a problem exists and 2) the opportunity and ability to fix it. In a previous post, we addressed the importance to franchisors of including notice provisions in the addendum to their franchisees’ leases that would alert them to existing or imminent franchisee defaults. That takes care of the first part of the problem-solving equation. The second part involves providing the franchisor with the right to cure a franchisee’s default and a specified period of time during which they are allowed to do so.
Granting the franchisor the right to cure a franchisee’s breach benefits both parties and should be freely given by landlords. The additional time provided to cure, however, can be more problematic. This provision can take several forms, such as a simple 30-day time period to cure a lease default or a requirement that a second written notice be sent to the franchisor if the default is not cured within the standard time provided. There are other variations, but the bottom line is that the franchisor is requesting additional time to remedy the default themselves if the franchisee/lessee fails to do so.
A Generous Cure Period Is Essential for Franchisors, but Can Be a Harder Sell for Landlords
From the franchisor’s standpoint, an adequate and realistic cure period is essential. When a franchisor receives notice of default, they may not be aware of the situation on the ground and may need time to review the problem and assess the appropriate remedy. Or the default may be a critical one, and the franchisor may need time to decide whether to take control of the location or seek out a new franchisee. Whatever the reason, the result for the landlord is the same— a lengthier delay before a default under the terms of the lease can be properly addressed.
A landlord’s receptiveness to providing the franchisor with additional time to cure depends on several factors, including the state of the economy and the franchisor’s financial stability. If the economy is strong, a landlord may have a long list of tenants ready to occupy the space in question, so accommodating a problem tenant and their franchisor may be the least attractive option. Conversely, if the economy is struggling and no prospective tenants are waiting in the wings, the landlord may want to make considerable efforts to keep the franchisee in the space, so long as the cost of doing so does not exceed the rent paid.
In addition, the landlord’s response to this issue may ride on the size and draw of the franchisor. Is this a business that attracts a good deal of traffic to the property (particularly important with shopping centers)? Does the franchisor have a large, financially sound operation with the capacity and desire to take over the space and operate the unit in default? Either way, a landlord that agrees to provide additional notice should ensure that the time period is reasonable and that the trigger for a franchisor’s response is clear. During this extended cure period, the franchisor will likely determine whether it will take over the location as a corporate-owned store or with a new franchisee.
On the one hand, a landlord should avoid being stuck in the position of dealing with a defaulting franchisee that continues operations on the premises, or, if the franchisee simply vacates the premises, having a vacant space for an unnecessarily long period. A landlord should have the opportunity to secure a new tenant quickly, if necessary, because a vacant space or a problematic tenant can injure the reputation of the landlord’s property and have an adverse effect on the landlord’s relationship with its other tenants. On the other hand, having a franchisor willing to step into its franchisee’s shoes may be worth the wait in a slow economy.
Not All Defaults Are Created Equal
One additional factor that should be considered when dealing with notice and cure provisions is the type of default at issue. Not all defaults are created equally or viewed in the same light by all parties. A landlord may be willing to allow for a delayed cure for a minor technical breach of the lease, but might be less receptive if a franchisee is multiple months behind on rent. A landlord should be wary of agreeing to wait an additional 30 or 45 days before possibly receiving a rent payment or being able to exercise its remedies under the lease. When confronted with the specific issue of defaults on rent payments, the parties can consider a provision requiring the franchisor to pay the past-due rent while the franchisor weighs its long-term options.