Is Cost Cutters Family Hair Salon obligated to guarantee a franchisee's lease?
Cost_Cutters_Family_Hair_Salon Franchise · 2024 FDDAnswer from 2024 FDD Document
- 22.2 FRANCHISEE'S ASSIGNMENT OF LEASE. The FRANCHISEE hereby assigns and transfers all of its right, title and interest in and to the Lease (which is incorporated herein by reference) to COST CUTTERS as security for the FRANCHISEE'S performance of the terms and conditions of this Agreement.
If this Agreement is terminated by either COST CUTTERS or the FRANCHISEE for any reason whatsoever, if the FRANCHISEE wrongfully terminates this Agreement by failing to comply with Article 10 or for any other reason, if the FRANCHISEE at any time ceases to do business at the Franchised Location as a Cost Cutters Business, or if this Agreement expires and the FRANCHISEE does not reacquire the franchise (an "Event of Default"), then COST CUTTERS will have the right and option, but not the obligation, to take and assume the Lease for the remaining term under the same terms and conditions, including rental, as originally contracted by the FRANCHISEE.
The FRANCHISEE will execute a UCC-1 Financing Statement and such other documents as may be reasonably required by COST CUTTERS' attorneys to perfect and record COST CUTTERS' security interest in the Lease.
- 22.3 PERFECTED ASSIGNMENT; NOTICE. This assignment will constitute a perfected, absolute and present assignment of the Lease; however, COST CUTTERS will have no right under this assignment to enforce the provisions of the Lease until an Event of Default has occurred.
After an Event of Default has occurred, COST CUTTERS will have the right, but not the obligation, to enforce the provisions of this assignment and to take possession of the Franchised Location by giving the FRANCHISEE and the Landlord written notice that it has affirmatively exercised its rights under this assignment.
The written notice will state: (A) that COST CUTTERS is taking and assuming the Lease from the FRANCHISEE; (B) the date that COST CUTTERS will take physical possession of the Franchised Location; and (C) that COST CUTTERS agrees to be bound by the terms and conditions of the Lease being assumed going forward.
COST CUTTERS will execute an assignment form at the time it gives written notice to the FRANCHISEE and the Landlord of its assumption of the Lease.
Source: Item 10 — FINANCING (FDD pages 42–43)
What This Means (2024 FDD)
According to the 2024 Cost Cutters Family Hair Salon Franchise Disclosure Document, Cost Cutters Family Hair Salon is not obligated to guarantee a franchisee's lease. However, the franchisee is required to assign their lease to Cost Cutters Family Hair Salon as security for their performance under the Franchise Agreement. This means that if the franchisee defaults on the agreement, Cost Cutters Family Hair Salon has the option to take over the lease.
Specifically, if the Franchise Agreement is terminated by either party, if the franchisee wrongfully terminates the agreement, ceases business at the franchised location, or if the agreement expires without renewal, Cost Cutters Family Hair Salon has the right, but not the obligation, to assume the lease for the remaining term under the original terms and conditions. To formalize this, the franchisee must execute a UCC-1 Financing Statement to perfect Cost Cutters Family Hair Salon's security interest in the lease.
Cost Cutters Family Hair Salon will only enforce the lease assignment after an event of default, providing written notice to both the franchisee and the landlord. This notice will state that Cost Cutters Family Hair Salon is assuming the lease, the date they will take possession, and that they agree to be bound by the lease terms going forward. Cost Cutters Family Hair Salon will also execute an assignment form at the time of this notice. This arrangement protects Cost Cutters Family Hair Salon's interest in maintaining the location for continued operation of a Cost Cutters Family Hair Salon business, but it does not obligate them to guarantee the franchisee's lease initially.