Franchisee Real Estate Lease: TERM

The term of a commercial lease is the duration for which the franchisee (tenant) is granted the right to occupy the leased premises.

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.

The term of a commercial lease is the duration for which the franchisee (tenant) is granted the right to occupy the leased premises. It is one of the most fundamental and critical elements of any lease agreement, as it dictates the length of the financial commitment for both the landlord and the tenant.

• Fixed Term vs. Variable Term:

  • Fixed Term: This is the most common type, where the lease has a clear start date and end date (e.g., "for a term of five (5) years, commencing on September 1, 2025, and ending on August 31, 2030"). This provides certainty for both parties.

  • Variable Term: Less common, but sometimes seen in short-term or temporary leases, where the lease continues on a month-to-month or year-to-year basis after an initial period.

• Commencement Date: The date the lease term officially begins. This is not always the date the lease is signed. It can be a fixed date or contingent on an event, such as the completion of tenant improvements.

• Rent Commencement Date: This is the date the tenant is obligated to begin paying rent. It is sometimes different from the lease commencement date, especially if there is a rent-free period for the tenant to complete their build-out.

• Options to Renew: A key provision often included in a commercial lease is an option to renew or extend the term. This gives the tenant the unilateral right to renew the lease for a specified period (e.g., "one (1) option to renew for an additional five (5) years").

  • Tenant's Advantage: This provides the tenant with flexibility. If their business is successful, they can stay in the space; if not, they can choose to vacate at the end of the initial term.

  • Conditions for Renewal: The renewal option is almost always subject to conditions, such as the tenant not being in default of the lease. The renewal rent is often set at the then-current market rate, with a formula to determine it, or a specific increase is agreed upon in advance.

Importance of the Lease Term for the Tenant:

• Financial Commitment: The term represents a significant financial commitment. A longer term provides stability and a more certain business plan, while a shorter term offers more flexibility to change locations.

• Negotiating Power: A longer lease term can give the tenant more leverage to negotiate favorable terms, such as a lower rent or a higher tenant improvement allowance, as the landlord is securing a stable, long-term revenue stream.

• Cost Amortization: For businesses that invest heavily in tenant improvements, a longer lease term is necessary to amortize those costs over time.

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.

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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.