Dealing with Default Clauses – For Franchise Tenants

Author: Dale Willerton

Date: APR 14th, 2015

Topic: Industry Experts

Every lease agreement has a standard default clause, which is there to protect the landlord. This default clause allows the landlord to sue or evict you and to basically enforce the lease agreement if you don’t pay your rent or otherwise disregard the lease. No business owner or tenant would expect otherwise. But landlords and their property managers deal with default notices differently. Some fire out nasty default letters to tenants without so much as a courtesy call to find out from the tenant what the problem is. Others may have a friendlier approach, but at the end of the day, all landlords want to collect their rent.

Default clauses fall into two general categories: material defaults and non-material defaults. Material clauses generally deal with money; whereas, non-material clauses deal with other actions that go against the lease terms:

Material Default Clauses:

A material default by a tenant involves nonpayment of rent or some other issue having to do with money. Maybe you’re late with payments, or your rent cheques have bounced. Sometimes tenants object to rising operating costs and year-end reconciliation statements and refuse to pay them out of protest. Landlords can evict for default, but what they really want is the money you owe them.

Non-material Default Clauses:

Parking issues are a good example of a non-material or non-monetary default. Perhaps your staff is parking in an area of the parking lot that’s designated for customers. Maybe you haven’t fixed a broken plate glass window or you remain closed for business on Sundays (when the landlord expects you to be open seven days a week). In these cases, eviction isn’t usually on the landlord’s mind. The lease agreement may state that they can fine or penalize you in some way for violating these clauses.

The time to defeat potentially dangerous default clauses is prior to signing the formal lease agreement. Many of the clauses than can come back to bite you can be modified or removed if you negotiate for them.

Here are a few of the most common default clauses:

No advance notice of default from the landlord:

Many lease agreements state that the tenant is automatically considered in default when the default action or event takes place. In other words, the landlord isn’t required to notify the tenant (and the tenant may not be aware that they’ve defaulted). Make sure that your lease clause states that the landlord must give the tenant 5 to 10 days’ advance notice to solve the problem before the tenant is actually in default.

Loss of rights such as renewal options and use exclusivities:

Some leases state that if the tenant defaults they lose important rights. The solution is to either delete this clause or include language that reinstates these tenant rights once you have cured the default. Don’t assume that those tenant rights are automatically reinstated just because you cure the default; the lease clause should allow for reinstatement.

Penalties and fines or interest:

The solution is to negotiate for lower penalties, or a three strikes clause, meaning the landlord can only penalize you if the same default occurs three times.

Future rent immediately due and payable:

When a tenant defaults, the landlord wants to be able to sue for more than the immediate rent arrears – they want to hit you harder. Removal of this clause or modification to a lesser amount, such as three months of rent becoming due, is advisable.

For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to DaleWillerton@TheLeaseCoach.com.

Learn more about franchise business opportunities in Canada at Be The Boss.