Legal Issues that Arise When Buying Existing Real Estate Franchises

Research shows that recent real estate franchising has become appealing to most first-time buyers lately. Why? Unlike other assets, buildings depreciate at a very minimal rate. A real estate franchisee acquires the right to use the franchisor’s name after buying a franchise.

According to Statista, real estate’s estimated revenue was to reach US$371.00bn this year– 2022. Additionally, the real estate sector is expected to experience a 3.61% growth rate in revenues through 2025. Being a real estate franchisee means becoming a boss, which comes with challenges, expectations, obligations, etc. Prospective buyers should seek legal counsel when buying a real estate franchise to mitigate the risk of failure.

Common Legal Issues that Occur when Buying Existing Real Estate Franchises

It should be noted that buying a franchise from an existing franchisee means acquiring franchise rights from the said franchisee and signing a franchise agreement with the franchisor. It’s also important to be aware that the following legal issues can occur when purchasing a current real estate franchisee:

1.  Re-Imaging and Brand Obligations 
   Buyers should find out if the seller is compliant with the franchisor’s brand requirements. A franchisor will typically require a prospective buyer to “re-image” the business to their satisfaction or standards. It’s therefore essential to be clear on who should pay for reimagining costs.
   
   
2.  Transfer Process and Approvals
   Most franchise agreements expressly prohibit franchisees from selling or transferring their interest without the franchisor’s approval. The buyer and seller should inform the franchisor of the sale at the earliest opportunity possible. The buyer will want the deal to be approved by the franchisor, and they will naturally want to know if there are any strings attached to that approval. Most franchise agreements specify the terms and conditions of terminating or transferring the interests of a franchisee to third parties.
   
   
3. Franchise Fees 
   Most franchise contracts require prospective buyers to pay a franchise fee to the franchisor before transferring the franchisee’s interests to a third party. The buyer and seller should agree on who should pay the transfer fee.
   
   
4. The Franchise Agreement
   Most franchise agreements require prospective buyers to sign the existing contract instead of drafting a new one. The purchaser does not have leverage in most cases, meaning they can’t negotiate the franchise agreement terms.
   
   
5. Leases and the Term of the Franchise
   The remaining term under the franchise contract and the remaining lease term can sometimes differ. For instance, the remaining period under the franchise agreement might be ten years, while the remaining lease is three years. The buyer should request a lease extension to match the franchise agreement term and the lease term. Real estate franchises are profitable and are popular with first-time genuine franchise buyers because of their high success rate.
   

It’s important to understand that real estate franchising has the same challenges as other franchises. Consequently, it would help to consider the challenges discussed in this article when purchasing an existing real estate franchise.