Franchising in Canada: aligning the commercial lease

Your business operates from well-chosen premises. But can its lease serve as a model for future franchisees? Building a sustainable franchise network means organising the relationships between the landlord, franchisor and franchisee. A lease signed too early, a prohibited use or incompatible timelines can jeopardise an otherwise well-planned opening.

1. Decide who will take on the lease

Before looking for the next location, decide who will be the tenant. This determines, among other things, who is responsible to the landlord for the rent and who can step in if trading stops.

The franchisee signs directly with the landlord. The franchisee takes on the lease obligations. The franchisor may request a separate agreement granting it certain rights, such as receiving notice of a default or proposing a replacement operator. The landlord must agree to these rights: including them only in the franchise agreement is not enough.

The franchisor leases the premises and then sublets them to the franchisee. This arrangement can make it easier to keep the location operating, but it leaves the franchisor liable under the head lease, even if the franchisee stops paying. Check that subletting is permitted and that the sublease terms are consistent with the head lease.

For a business starting to franchise, prepare a decision brief setting out:

• who pays the deposit and provides guarantees;
• who funds the fit-out and owns the equipment;
• who pays the rent before opening;
• who bears any remaining obligations after an operator leaves.

Do not choose a structure simply because it appears to offer greater control. Assess the financial commitments it creates for your existing business as well.

2. Turn experience from your first premises into criteria you can verify

Your current premises provide useful observations, not a guarantee that any similar property will be suitable. Identify the constraints that genuinely affect operations: electrical capacity, ventilation, delivery access, parking, storage, visibility and accessibility.

Then create a premises approval checklist covering three separate checks:

• Commercial: does the location suit the intended customer base and operating model?
• Technical: can the facilities accommodate the business without disproportionate alterations?
• Legal: do the lease, zoning rules and necessary approvals actually permit the proposed use?

For example, municipal permission to run a food business does not mean the lease permits cooking or the installation of an extraction system. Equally, the landlord’s consent does not replace the required permits.

Also clarify the scope of your approval. A franchisor can confirm that premises meet its criteria without guaranteeing profitability or replacing the franchisee’s professional due diligence. Explain this distinction clearly, without using it to conceal a known problem.

3. Plan the signing process around disclosure rules

Canada has no general federal franchise disclosure regime. Specific obligations are set at provincial level. For example, Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 and Manitoba’s The Franchises Act govern pre-contractual disclosure.

In provinces with an applicable regime, the general rule is that the disclosure document must be provided at least 14 days before an agreement relating to the franchise is signed or any payment is made to the franchisor or a related party, subject to provincial exceptions. A sublease granted by the franchisor therefore deserves particular attention.

The disclosure document must include the required franchise-related agreements and material facts. Obtain advice on how to present the lease, sublease, guarantees and known property costs within it. A material change occurring after delivery may also require further disclosure before the transaction is concluded.

A lease signed directly with an independent landlord requires a separate assessment. Even if it does not itself trigger disclosure rules, it can commit the prospective franchisee before the project is secure.

In Quebec, no specific franchise legislation requires the same standardised disclosure document. The Civil Code of Québec, particularly its good-faith rules and the duties to inform recognised under civil law, remains relevant; the Charter of the French language may also govern contractual documents.

Have the sequence of commitments reviewed before anything is signed, including any potentially binding offer to lease.

4. Align timelines and prepare for difficulties

Use a table to compare the lease term, franchise term, renewal options and notice deadlines. A franchise agreement that ends before the lease can leave the franchisee paying for premises without the right to use the brand.

Also check assignment provisions, personal guarantees, reinstatement obligations and signage removal requirements. If you want the right to take over the premises, negotiate the necessary consents with the landlord rather than assuming the franchise agreement can replace them.

Key takeaway: before offering your first franchised location, have the lease, franchise agreement and disclosure timetable reviewed together. Their alignment matters just as much as the quality of the premises.