News

O’Brien’s examinership lease saga

25 September 2009

Part of O'Brien's Sandwich Bars’ scheme to work its way out of examinership involves transferring the leases for its outlets over to franchisees. However, franchisees aren’t keen on the plan. Larry Ryan answers some of the questions surrounding this complex case.

What is the O’Brien’s plan?
Two investors – Graeme Beere, who runs Abrakebabra, Gourmet Burger and Bagel Factory, and Denis Desmond, founder of MCD Promotions – have indicated they are prepared to invest in O’Brien’s and bring it out of examinership.

What’s the catch?
Beere and Desmond – under the company name AIL Ltd – insist they won’t complete the investment unless all 82 franchisees take over the leases for their outlets, currently held by O’Brien’s. So examiner Paul McCann can’t finalise his scheme of arrangement until some agreement is reached.

Why does O’Brien’s hold the leases anyway?
While a little unusual now, Daniel Cashman, head of the franchising unit at Beauchamps Solicitors, insists that the O’Brien’s model was once commonplace and is one that has worked well for many international franchisors.

“At the time, that was the norm. The franchisor would take the head lease on premises and sublet to franchisees. There were good commercial reasons. It gave the franchisor more control, more leverage if a franchisee wasn’t complying with the terms of their agreement. It’s a system that has worked well for many of the high-profile multi-national franchise companies.”

Why don’t franchisees want to take over the leases?
Solicitor and franchising expert Bill Holohan, who has been acting for a group of franchisees, has commented: “We do not support this approach as we are financially unable to take on lease agreements agreed by the company due to the dramatic downturn in business and (we) are also being asked to provide personal guarantees.”

What moves have O’Brien’s made so far?
The company has written to franchisees stating that the examiner, Paul McCann of Grant Thornton, would apply to the High Court to repudiate any leases that had not been transferred by the 15th of this month.

Last Friday in the High Court, Mr Justice John MacMenamin granted the company permission to seek orders revoking a number of its leases.

If the leases are repudiated, where does that leave franchisees?
Two legal sources differed on this point. One franchising expert believes that if O’Brien’s breaks its leases, franchisees who sublet will not be obliged to continue with their own agreements. In this event, a franchisee would no longer have the right to occupy its premises and without a place to trade, the franchise agreement may be nullified, giving the franchisee an escape route.

However, Daniel Cashman doesn’t agree with this theory. He believes a repudiation of the leases would effectively transfer them to each sub-letee, who would be bound by the same lease conditions.

What if no agreement is reached and O’Brien’s is liquidated?
AIL Ltd has promised that it will buy the company from liquidation if necessary, but wants to avoid that kind of dent to the chain’s reputation.
It is likely that a liquidator would disclaim O’Brien’s leases anyway, so franchisees may be forced to take over leases regardless.

What if a franchisee wants to get out of its agreement?
Graham Beere has written to franchisees warning that they would be liable for their franchise agreements even if the company was liquidated. However, Cashman believes that liquidation would make it very difficult for O’Brien’s to fulfil its own part of these agreements.

“If O’Brien’s isn’t able to meet its own obligations set out in the franchise agreement, such as management support and so on, that’s the most likely route out of an agreement for the franchisees.”