• April 17, 2017

Collateral Assignment of Lease (Pro-Franchisor)

Cheat Sheet

Collateral Assignment of Lease (Pro-Franchisor)

Collateral Assignment of Lease (Pro-Franchisor) 800 450 Leasing REality | Commercial Real Estate Education

A well-crafted franchisor-friendly document to be included as an integral part of a lease with a tenant franchisee will generally include the following, at a bare minimum:

Notice of Tenant Default: The landlord must notify franchisor in writing of any default by tenant under the Lease as and when such defaults occur.

Franchisor’s Right to Take Possession of Tenant’s Space: If tenant defaults on its obligations under the lease or under its franchise agreement, beyond applicable notice and cure periods, the franchisor shall have the right to take possession of the tenant’s space and thereafter tenant shall have no further right pursuant to the lease.

Landlord’s Obligations Upon Franchisor’s Exercise of the Collateral Assignment: If franchisor exercises its rights under the Collateral Assignment, landlord shall take all action necessary to retake the premises (such action including termination, eviction and legal action).

Franchisor’s Obligations: Franchisor shall have no obligation under the Collateral Assignment until the premises are lawfully tendered to it.

Franchisor Supplanting Tenant: If the franchisor takes possession of the premises and assumes the lease as tenant thereunder, the landlord shall be required to recognize the franchisor as tenant under the lease (Note: some franchisors prefer not to assume the lease, and as such, they essentially request that they retain the right to step into the shoes of their departed franchisee until such time as they have a replacement franchisee (without the franchisor technically “assuming” the lease).

Assignment at Franchisor’s Discretion: The landlord agrees that the franchisor may further assign the lease to any person or entity, who as part of such assignment, shall agree to assume tenant’s obligations under the Lease.

Franchisor Liability Discharged Upon Assignment: Upon an assignment from the franchisor to its new franchisee, franchisor shall have no further liability or obligation under the lease.

Removal of Proprietary Marks from Premises: Upon termination or expiration of the franchise agreement or the lease, franchisor shall have the right to enter the premises to make all necessary modifications or alterations to the premises for the removal of all articles which display franchisor’s proprietary marks (including all stationery, forms signs and advertising materials).

Landlord Advocates: Attempt to create carve-outs to the foregoing requirement. Please note that, at a bare minimum, franchisors will nonetheless require (1) notice of tenant/franchisee default, (2) the right to step into the tenant’s shoes upon the occurrence of uncured default and (3) the absolute right to assign the lease to a franchisee of its choosing.

Tenant Advocates: Although a tenant’s negotiating leverage with it franchisor is limited in most circumstances, nonetheless the tenant should attempt to secure protective carve-outs within the Collateral Assignment (e.g., a liability disclaimer/limitation clause regarding any damages, claims for lost profit or business opportunity or the cost to build out the premises for prospective tenants beyond a simple vanilla shell). A sample provision of the foregoing would be along the lines of: “In no event shall Assignor/Tenant be liable for (i) consequential, punitive or incidental damages, including without limitation, any claims for lost profits and/or loss of business opportunity, and/or (ii) the cost to build out the Premises for any prospective tenants beyond a simple vanilla shell.”

Aside from leases with franchisees, collateral assignment of leases are also used when:

  • A business is sold to a buyer with “seller financing”; or
  • on bank loans on income producing property.

In either scenario, the assignee/lender has agreed to extend a loan to the borrower, evidenced by a promissory note and other related loan documents. To secure the loan, the borrower and assignee/lender have agreed to an assignment of the lease for collateral purposes, on the terms and conditions set forth in the collateral assignment of lease.