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Constructing a franchise agreement and associated underlease: What you need to consider

Citation: Miscela Ltd v Coffee Republic Retail Ltd [2011] EWHC 1637 (QB)

Keywords: Franchise and associated underlease – Underlessor surrendered headlease – Exercising of break clause in underlease by head lessor – Effect on franchise agreement – Construction of term of franchise agreement

The Issue

How should provisions of a franchise agreement and associated underlease be constructed?

Should such provisions be construed to protect the franchisor from liability for breach of contract by reason of the lawful actions of the freeholder of the premises?

The Facts

The Claimant entered a franchise agreement with a franchisor and an underlease with an associated company. Both companies went into administration. The Underlessee company surrendered its head lease to its landlord. The landlord then exercised a break clause in the underlease forcing the Claimant to vacate the premises. The Claimant claimed the Defendant, the assignee of the franchisor, was in breach of contract. The clause allegedly breached was clause 2.2 of the Franchise agreement.

Clause 2.2 provided “we grant you during the term... the rights to carry on a Coffee Republic Deli from the premises...”

Clause 4 provided “we will procure that you will be granted an underlease in respect of the premises” and “if the Premises becomes unavailable to run Your Coffee Republic Deli from, due to a reason other than your breach of the Underlease you may relocate Your Coffee Republic Deli to another location provided ...”. The applicable conditions related to a lack of fault on the franchisee’s part and the appropriateness and approval of the new premises.

The break clause in the Underlease could be exercised by the underlessor without grounds at any time on one month’s notice.

On cross applications for summary judgment, the Master gave judgment for the Defendant on the basis clause 2.2. The Claimant appealed.    

Held

(Coulson J) (1) The usual principles of construction apply and accordingly the provision should be given its natural meaning viewed in the context of the document as a whole and the commercial and factual background. However unless the most natural meaning produces such an extreme result as to suggest objectively it was unintended the natural meaning of the words prevail.

(2) Clause 2.2 did not confer any right to occupy the premises and accordingly there was no breach of that provision. In particular the proper construction of clause 2.2 did not include a right occupy because:-

(i) the right identified was the right to carry on business at the Premises could not include the right to occupy which was not identified or detailed in that agreement and was a right the party to that agreement, the franchisor, could nto grant;

(ii) the franchisor’s obligations in relation to the Premises were expressed in the Franchise Agreement were confined to “procuring” the underlease which was consistent with the fact it could not grant any interest itself and clause 2.2 not including any rights related to the property;

(iii) in any event any right to occupy under clause 2.2 was by reason of clause 4 subject to the terms of the underlease which provided for a break clause exercisable at any time and clause 4.4 contemplated the Premises becoming unavailable.

Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 applied; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 applied;
Rainy Sky SA v Kookmin Bank [2010] EWCA 582 applied.

Comment

This case illustrates the importance of considering how various agreements entered into in the context of a franchise relate to, do not relate to, or depend upon each other. The need to consider such matters is particularly acute where a franchise is to be based in premises and the franchisor, or an associated company, has a superior interest in those premises or any rights over the franchisee’s interest in the same.

It cannot be simply assumed by either party that the franchise and lease stand or fall together unless the agreements provide for that. The premises become an integral part of the franchise, and any goodwill built, which the franchisee was to benefit from for the term of the franchise, is attached to it. Both may assume the ability of the franchisee to exploit the premises and franchise or the franchisor to recover control and use of them are inextricable linked, but that will only be the case if the documentation provides for it.

Case summary by Brie Stevens-Hoare