Buying a Franchise in Canada: Checking the Commercial Lease

Buying a franchise with business premises means taking on two commitments that must work together: the franchise agreement and the commercial lease. An appealing brand cannot make up for unusable premises or rent that remains payable after you lose the right to operate. Before joining a franchise network, review these documents together with your lawyer and accountant.

1. Establish who actually controls the premises

Start by finding out who signs the head lease. You may rent directly from the landlord, sublet from the franchisor or occupy the premises under another agreement. These arrangements do not give you the same rights.

If you rent directly, you remain responsible to the landlord even if your relationship with the franchisor deteriorates. If you sublet, your occupation also depends on the head lease: a breach by the head tenant could put your business premises at risk.

Ask to see:

• the complete lease, including its schedules and amendments;
• the sublease or occupancy agreement, where applicable;
• any personal guarantees required;
• clauses allowing the franchisor to take over the premises;
• the approvals needed to assign the lease or change the business operator.

The franchisor’s approval of the location is no substitute for reviewing the lease. Also confirm that the permitted use covers every activity you plan to carry out: retail sales, food preparation, delivery or additional services, depending on your business concept.

2. Align the terms and exit options

Create a single timeline showing the start of the lease, the handover of the premises, the date rent becomes payable, the planned opening and the expiry of the franchise agreement. Add renewal dates and notice deadlines.

A mismatch can create a costly obligation. If the franchise agreement ends before the lease, you could have to pay for premises without being able to use the brand. If the lease expires first, your franchise agreement could continue even though you no longer have an approved location.

Do not assume that renewal options are automatic. Check their conditions: no outstanding breaches, notice served on time, a new rent calculation or the signing of a new franchise agreement.

Also ask a crucial question: what happens if you sell the business? Both the landlord and the franchisor may need to approve the buyer. Assigning the lease does not necessarily release you from your obligations or your personal guarantee. Have the conditions for any release confirmed in writing.

3. Calculate the true cost and required works

The advertised rent is only a starting point. Your cash-flow forecast must include the additional charges specified in the lease: property taxes recoverable from the tenant, common-area costs, insurance, maintenance and, sometimes, turnover-based rent.

Ask for the available statements of charges and details of how those costs are allocated. Identify any charges the landlord can adjust and any rights you have to check them.

For building and fit-out works, establish who is responsible for each item:

• who pays for electrical alterations, ventilation and accessibility improvements;
• who obtains permits and approvals;
• when the landlord’s fit-out contribution is paid and on what conditions;
• who is responsible for major repairs and reinstating the premises when you leave.

Distinguish the works needed to open from refurbishments the franchisor may require later. It can be difficult to recover the cost of a compulsory refurbishment shortly before the lease expires. Ask your accountant to model a delayed-opening scenario: rent, interest and other expenses may start before you make your first sales.

4. Arrange a legal review before committing

In Canada, franchise-specific rules are set at provincial level. The lease should therefore not be reviewed in isolation from the disclosure requirements that apply to your purchase.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 generally requires a disclosure document to be provided at least 14 days before you sign a franchise-related agreement or pay any consideration. Exceptions exist: have any deposit or preliminary commitment checked rather than assuming it is permitted.

The document must include material facts and copies of the proposed franchise-related agreements, among other information. Relevant property commitments should be reviewed as part of this process. The Act also provides for a duty of fair dealing, franchisees’ right to associate and remedies for inadequate disclosure.

In Quebec, there is no specific legislation requiring a franchise disclosure document under this model. The Civil Code of Québec applies, including its rules on good faith, contracts and leases. The absence of a mandatory disclosure document does not remove the need for thorough due diligence.

Key takeaway: before signing anything, have the lease, franchise agreement and budget reviewed together. Insist on written answers about the terms, works, guarantees and exit arrangements.