Real Estate Matters in Acquisitions and Mergers

AuthorHerbert A. Hedden and Judith L. Marsh
Pages129-153
I. INTRODUCTION
All franchise systems have some aspect of their business that has a real
estate component if, for no other reason than for ofce space (which, in
some cases, might be a home ofce) where the franchisor operates its
business. For many franchise systems, real estate plays a much more
signicant role, particularly for retail establishments where the fran
chise brand is in the public view on a daily basis. When a franchisor is
being acquired by the sale of its assets or ownership interests, or by
merger with another entity, there are a variety of legal matters to con
sider relating to the real estate. Many of these issues are the same as in
any other transaction involving the acquisition of any business, whether
franchised or not. However, some matters are particular to a franchise
system where the relationships with franchisees can add an extra layer
of complexity and require additional due diligence.
The purpose of this chapter is not to address all of the methods of real
estate control that are common in any business, nor to address the due dili
gence common to the acquisition of a non‑franchised company, but instead
to focus on the aspects of real estate control that are inherent in operat
ing a franchise system and in acquiring a franchise system. This chapter
addresses the issues that counsel should consider when structuring the
transaction, negotiating the deal, drafting the documentation, and deter
mining the scope of real estate due diligence. While the type of transaction
involved—asset sale or the sale of ownership interests (stock, membership,
or partnership interests, or a merger)—is an important factor in determining
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Real Estate Matters in
Acquisitions and Mergers
Herbert A. Hedden and Judith L. Marsh
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the type of documentation that will be necessary, many of the real estate matters
involved in the acquisition will be applicable regardless of the transaction structure.
Where appropriate, this chapter suggests representations, warranties, and covenants
to include in the acquisition documents and will distinguish where those provisions
may need special consideration when the transaction structure (e.g., stock, member
ship or partnership interest purchase, or asset purchase) is a factor.
II. CONTROL OF THE FRANCHISED SITE
Because a franchise system by its nature includes relationships with independent
business owners, the issue of control over the real estate where the franchised
business is operated (each a “site”) can be very important to the franchisor. Own
ership and control of the site is particularly important for retail establishments
where the franchise brand is in the public view.
There are a number of methods by which the franchisor might control the real
estate in the franchise system: (a) direct ownership through leasing or subleasing
by the franchisor; and (b) where the franchisor has no direct control, through
collateral assignment of the franchisee’s lease, a lease rider attached to the fran‑
chisee’s lease, recorded restrictions, liens, and other security interests where
the franchisee owns a fee simple interest in the property. A franchisor may prefer
some methods over others depending upon its need for control of the real estate
in the system and the costs and risks of the particular type of control method.
The main reason for a franchisor to control the site is to ensure that the site
stays in the franchise system, or at least out of the hands of a competitor. Fran‑
chisors who control the site are better able to retain the site as a franchised
outlet and to better protect against a franchisee who continues to operate the
franchised business after termination of the franchise agreement in violation of
the post‑term noncompetition covenant. For instance, if the franchisor directly
controls the site, it can terminate the franchise agreement, evict the franchisee
and, thereafter, set up a new franchisee, a company‑owned operation, or lease the
site to a noncompetitor. An additional advantage to the franchisor who controls
the site is the reduced likelihood of an unhappy franchisee leaving the franchise
system and opening a competing business at the site.
A. Direct Control
1. O wne rship
Some franchisors own all or some of the real estate from which its franchisees
operate their franchised businesses. This provides the franchisor the greatest
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