Shields Legal’s Banking & Finance team regularly advises lenders and borrowers on negotiating franchise comfort letters, often referred to as cooperation agreements. These tri‑party agreements among the franchisor, franchisee‑borrower, and lender are a common feature of hotel and multi‑unit restaurant financing. Franchisees often desire financing for the build out, operation, or expansion of their business. Lenders want confirmation of their rights in the borrower’s collateral (including the franchise agreement) and often the ability to operate the franchise if the borrower defaults. Franchisors are usually willing to offer limited accommodations to support the financing because funded projects should mean additional royalty and fee income. Negotiating these tri-party agreements can be challenging due to the different goals and relationship dynamics of the franchisor, franchisee, and lender.

Essentials for the Lender

Lenders commonly ask franchisors to include these core provisions:

• Consent to the financing and lender’s liens.
• Notice of franchisee’s default and opportunity for the lender to cure.
• Ability to step into the franchisee’s position to operate the franchise and/or transfer ownership.

Typically, most franchisors are willing to accommodate these requests to varying extents.

Franchisor Accommodations

Franchisors seek to balance potential additional income from franchisees opening new locations with brand protection. Established franchisors generally have a form comfort letter, which is especially true for hotel franchisors. If a franchisor has many locations, entering negotiated comfort letters with different lenders can quickly compound their compliance burden. Operational realities must be weighed against the additional income generated by a growing franchise system.

Franchisee/Borrower Considerations

Franchisees desire to maintain a strong relationship with their franchisor while closing the financing on workable terms. Above all, franchisees want to close the deal and retain the flexibility to grow and expand their business. In some comfort letter negotiations, the franchisee plays only a limited role while the franchisor and lender negotiate directly. In others, the franchisee must actively engage with both parties to help move the transaction toward resolution. Throughout the process, franchisees should remain alert to comfort letter provisions that impose obligations beyond those required under the franchise agreement. Equally important, franchisees should seek loan terms that limit the risk of unexpected debt acceleration or other lender remedies triggered by circumstances outside their control.

Lender Considerations

As noted above, lenders typically focus on obtaining the franchisor’s consent, notice and cure rights, and some form of assignment or continued operation rights. In sectors where comfort letters are largely standardized, such as hotel and multi‑unit restaurant financing, established franchisors often rely on their own form comfort letter. Lenders typically achieve better results when they approach negotiations with a focused, curated set of requests rather than broad markups. Lenders are also more successful where a franchisor is flexible on form and where the franchisee maintains a strong relationship with the franchisor. Comfort letters are especially critical in transactions where the lender’s security and underwriting depend on the continued operation of the franchise.

Conclusion

Shields Legal has assisted numerous lender and borrower‑franchisee clients in successfully negotiating franchise comfort letters. While these negotiations can be complex, often involving multiple stakeholders and industry‑specific considerations, we focus on simplifying the process by identifying and securing the key protections needed to close the transaction, minimize risk, and advance our clients’ business objectives.