Financial Post:

When it comes to choosing a particular location for a franchise, franchisors generally have two options — to be the tenant or not be the tenant.

One of the most common lease arrangements in franchise relationships is where the franchisor negotiates a lease for the premises, enters into the head lease with the landlord and then subleases the space to the franchisee. Landlords prefer the sublease model because they have the franchisor (i.e. the party with the deeper pockets) on the hook for the lease, and the one they would prefer to have recourse against if problems arise. Franchisees like the sublease model because they obtain the benefit of the franchisor’s bargaining power to negotiate more favourable lease terms.

The sublease model is also an attractive option for the franchisor because, assuming it’s a desirable location, it retains possession of the premises while franchisees come and go. Read more.