Franchisee Real Estate Lease: GROSS LEASE

A gross lease is a commercial real estate lease where the franchisee (tenant) pays a single, all-inclusive, fixed rental rate.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The complexity of the lease agreement for the commercial real estate that is used in the franchise operation can very easily equal, or even surpass, that of the franchise disclosure document and the franchise agreement, such that retaining the legal services of an experienced lawyer to decipher, explain and negotiate the commercial lease agreement and its schedules. And for over 25 years, we have been working with business owners, including franchisees, to understand and deal with commercial lease agreements that have been presented by landlords and are foundational to their business operations. To gain the most from our legal analysis and advice as to the commercial leasing arrangement, a franchisee would be well served to understand some of the most significant commercial leasing terminology, which we have undertaken to provide you with in-depth analysis.

A gross lease is a commercial real estate lease where the franchisee (tenant) pays a single, all-inclusive, fixed rental rate. In this arrangement, the landlord is responsible for paying all of the property's operating expenses. This is the most simplified type of lease agreement.

The franchisee's (tenant's) financial responsibility is straightforward, as they must pay a fixed, flat rent amount each month. Meanwhile, the landlord is responsible for covering all of the major property-related expenses, including:

Property Taxes: Real estate taxes on the building.
Building Insurance: Insurance for the structure of the building.
Maintenance and Repairs: This includes day-to-day upkeep, common area maintenance (CAM), and often major structural repairs.
Utilities: Often, but not always, the landlord pays for utilities like electricity, water, and gas. It's crucial for the tenant to clarify this in the lease agreement.

There are a few variations of a gross lease:

Full-Service Gross Lease (FSG): This is the most common form of a gross lease. The landlord covers virtually all expenses, including all utilities and janitorial services.
Modified Gross Lease: This is a hybrid lease that falls between a gross lease and a net lease. The tenant and landlord share some of the expenses. For example, the tenant might pay for their own utilities and janitorial services, while the landlord covers taxes, insurance, and maintenance. Often, a modified gross lease will include a "base year" clause, where the landlord pays all expenses up to a certain point, and any increases beyond that base year are passed on to the tenant.

From the tenant's perspective of assessing the advantages and disadvantages of a gross lease:

Advantage - Simplicity and Predictability: The tenant has a fixed, predictable monthly payment, which makes budgeting and financial forecasting much easier.
Advantage - Less Administrative Work: The tenant doesn't have to worry about tracking and paying separate bills for taxes, insurance, and maintenance. This allows them to focus solely on their business operations.
Advantage - Reduced Financial Risk: The tenant is protected from unexpected increases in operating costs, such as a sudden jump in property taxes or an expensive HVAC repair.
Disadvantage - Higher Fixed Rent: Because the landlord is absorbing all the operating costs, the fixed rent amount is typically higher than in a net lease.
Disadvantage - Lack of Control: The tenant has no control over the property's maintenance or service providers, which can be a problem if they are dissatisfied with the quality of service.

Naturally, how the concept operates in the specific context of the particular lease agreement requires experienced legal analysis, such that you make the most out of your understanding of the commercial lease agreement for your franchise. For such legal analysis and advice for your franchise and its commercial leasing arrangements, we welcome you to contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com to schedule a confidential consultation.

Franchisee Real Estate Leasing Basics - Many franchise arrangements require that business operations are undertaken from commercially leased real estate, where it is next to impossible to purchase acceptable real estate at which the franchised business is to be undertaken. As such, it is imperative that your commercial leasing arrangements are correctly undertaken and don't financially hurt your business' profitability, with an understanding of the basics of commercial leasing of real estate being important. Read more.

Franchisee Real Estate Lease: Build and Build-out - Although there are a multiplicity of factors at play when a franchisee is looking to commence their particular franchise operation, two of the more consequential aspects that the franchisee (lessor) needs to be aware of are the build (construction of the building) and the build-out (internal work on the leased premises). Read more.

Franchisor as Tenant (with Franchisee subleasing) - Whereas the typical leasing arrangement is for the franchisee to lease the subject property from the property owner (landlord); on occasion, the franchisor will lease the property from the property owner and thereafter proceed to sublease that same property to the franchisee. As opposed to the franchisee leasing directly from the property owner, having the franchisor enter into the lease with the property owner can be advantageous to the franchisee. Read more.

Review your Commercial Lease Agreement

Click on for More Franchising Videos for Franchisees

youtube franchisee lawyer