Franchisee Real Estate Lease: SECURITY DEPOSIT

A security deposit in a commercial lease is an amount of money paid by the franchisee (tenant) to the landlord at the beginning of the lease term, which is intended to provide the landlord with financial security against potential future defaults by the franchisee (tenant).

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 security deposit in a commercial lease is an amount of money paid by the franchisee (tenant) to the landlord at the beginning of the lease term, which is intended to provide the landlord with financial security against potential future defaults by the franchisee (tenant).

A security deposit is not meant to be a pre-payment of rent. Instead, it is held by the landlord and can be used to cover various costs if the tenant fails to meet their lease obligations, including:

• Unpaid Rent: The most common use of the deposit.

• Damages: Costs to repair any damage to the premises beyond normal wear and tear.

• Default: Any other costs incurred by the landlord due to the tenant's default, such as cleaning fees or re-leasing costs.

• Re-keying: The cost of changing locks if the tenant fails to return the keys at the end of the term.

The commercial lease agreement should clearly define the terms regarding the security deposit. Key elements of a security deposit clause should include:

• Amount: The amount is typically a multiple of the monthly rent. It can range from one to six months' rent, depending on the tenant's financial strength, credit history, and the perceived risk.

• Form of Deposit: The deposit is usually paid in cash or by a certified check. In some cases, a landlord may accept a letter of credit from a bank, which can be a more attractive option for tenants as it doesn't tie up their cash.

• Holding and Interest: The lease agreement should specify how the landlord will hold the deposit. Unlike residential leases, there are generally no laws in Canada that require landlords to hold commercial security deposits in a separate, interest-bearing account. As a result, many landlords will hold the deposit in their general operating account, and the tenant will not earn any interest on it unless the lease agreement explicitly says otherwise.

• Application of the Deposit: The lease agreement will typically state that the deposit can be applied to any monetary default by the tenant. It is important to note that the tenant cannot dictate how the deposit is used, with the landlord having discretion to apply it as they see fit.

• Return of the Deposit: The lease should specify the conditions and timeline for the return of the unused portion of the deposit. This typically occurs within a certain number of days (e.g., 30 to 60 days) after the lease expires and the tenant has vacated the premises, provided all obligations have been met.

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.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.