Lease Considerations for Franchisees | Franchising in Canada
Site selection and lease negotiations are among the most critical tasks facing a new franchisee. While the franchisor often selects the site, the franchisee is typically required to accept the choice, but bear the risk of doing so. Where the franchisee selects the franchise site, they must often negotiate (or accept) a complex lease or sublease.
Some of the key issues that any franchisee should consider when dealing with franchise leases include:
i. Site selection:
You should always conduct your own franchise site due diligence. Review traffic flows (pedestrian and automotive), inspect the site, consider demographics and neighbouring stores, parking capacity, and restrictive covenants (ie. the things you cannot do or offer for sale within the store).
Will you lease your franchise location directly from the landlord or sublease the premises through the franchisor? In the latter case, the franchisor/landlord may be in a better position than you would be on your own to obtain more favourable rent, lower common area maintenance charges (“CAM”), and exclusivity in the complex for your franchise business. You should note, though, that some franchisors may “bump” the rent somewhat in excess of their payments under the head lease. If you lease directly, the franchisor will usually require you to give them the option to assume your lease if you default under your franchise agreement. As well, if there is a default, the franchisor will not be there to “cover” you if you do not have funds for rent or other payments.
Is rent under the initial and renewal terms at market rates? What is the CAM? Are they at market? Is there a cap on annual CAM and CAM increases? Is additional rent payable?
Ensure that the landlord has approved the franchise site design plan. In terms of signage, be clear where signs will be located, and what kind of sign(s) you must have, as internally-lit or backlit “box” signs are more costly than other forms of signage. Confirm with your landlord or the franchisor that rent is not payable until the premises are completed.
v. Permitted Use:
Confirm whether the sale of certain products or services is prohibited by the franchise lease, or whether you can get an exclusive right to offer your wares/services.
Try to tie the length of the lease to that of your franchise business agreement. Consider your risk if the franchise terminates prior to the end of the lease/sublease.
What are the conditions of lease renewal, particularly in terms of rent increases or renovation requirements? Is the option to renew yours or the landlord’s?
viii. Repair and Maintenance:
Ensure that you are not liable for any structural repairs or maintenance expenses not related to the interior of your leased premises.
Ensure that consent to an assignment of your lease cannot be unreasonably withheld.
x. Default Provisions:
Are they reasonable? Do you have a reasonable right to cure (remedy) any defaults?
The landlord should only have the right to relocate or terminate you upon the occurrence of certain, narrow conditions. If there is a right to relocate, make sure that the relocated premises are to be substantially the same as the original premises. If the franchise agreement is terminated, do you have the right to maintain the lease, and if so, on what terms?
This is a brief list of franchise issues to consider, but a franchisee should always consult qualified legal counsel prior to entering into any franchise or lease agreement.