One of the toughest and most time-consuming terms to be negotiated in franchised restaurant leases for Landlords, Tenant/Franchisees and their Franchisors is partial or total exclusive rights on sale of certain food products and meals. Landlords seldom desire to lock up potential sales/uses in a Center with one or two tenants, while a Franchisor and its Franchisee have a vested interest in protecting their brand and profits from sales of specialty items. This inherent tension can cause problems if not carefully negotiated by all parties.
A Franchisor will typically be interested in:
1. Protecting its brand and trade name status;
2. Insuring that no other competitors are placed in the Center by the Landlord;
3. Broadly defining their “use” and exclusives to allow for the greatest flexibility in sales and variety; and
4. Maximizing their ability to step into the Franchisee’s shoes or replace the Franchisee with another user.
A Franchisee will likely be interested in:
1. Protecting its stature as the only business in the Center to provide the product or service to customers;
2. Minimizing its exposure to personal liability and any violation of other existing or contemplated exclusives;
3. Maximizing its ability to assign or sublet to another similar OR different user; and
4. Enhancing its ability to market its products and services to Center customers and the surrounding demographic.
A Landlord will primarily be interested in:
1. Keeping intended uses and exclusives as narrowly defined as possible;
2. Minimizing the involvement of the Franchisor in any activities in the Center;
3. Curtailing any rights of sublease/assignment or other Franchisor rights upon Franchisee default; and
4. Insuring that the uses and exclusives proposed by the Franchisee and Franchisor do not impinge on exisiting uses or exclusives held by anchor or junior anchor tenants in the Center.
How can these motivations and concerns be reconciled? The true answer is most of the time they cannot be fully resolved at the drafting stage of the Lease. However, there are some touchstones that the parties can follow to make the relationship work for the greater good of all in the Center. To avoid conflict and protect rights and maintain flexibility of tenant and use, the Landlord, Franchisor and Franchisee should focus on some basic negotiating strategies.
A. Be Specific in which uses and exclusives are allowed – it is worth the time and effort;
B. Identify critical and primary uses early in the negotiations and compare them to the existing and potential uses in the Center, while also identifying incidental uses;
C. Understand and agree that uses and exclusives held by current tenants cannot be renegotiated;
D. Create remedies for non-use by Tenant/Franchisee (i.e. if you don’t sell it, you lose your rights);
E. Work together to formulate Tenant remedies for violations by Landlord, but give Landlord a reasonable notice period to correct or resolve any violations of the existing exclusive uses; and
F. Agree on remedies that will reflect the damage to each party’s rights if the exclusive use clauses are violated; i.e. eviction/collection remedies if Tenant intentionally violates an existing exclusive; AND damage rights if Landlord fails to correct a violation of an exclusive right held by Tenant (and violated by another tenant) within a reasonable time.
So, pause when this issue approaches you in the LOI. It needs scrutiny and care. And that could save time and $$$ !!!