Franchisee Real Estate Lease: TRIPLE NET LEASE

A triple net lease is a commercial real estate lease where the franchisee (tenant) is responsible for paying a lower base rent plus nearly all of the property's operating expenses (property tax, insurance and maintenance).

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 triple net lease is a commercial real estate lease where the franchisee (tenant) is responsible for paying a lower base rent plus nearly all of the property's operating expenses (property tax, insurance and maintenance). It is one of the most common and popular lease types for commercial properties because it offers a highly passive investment for the landlord.

In a triple net lease, the franchisee (tenant) is responsible for paying three main categories of expenses, in addition to their base rent:

• Property Taxes: The tenant pays the real estate taxes on the property. This can be the entire amount or a proportional share in a multi-tenant building.

• Building Insurance: The tenant is responsible for the insurance premiums that cover the property's structure against damage, as well as liability insurance.

• Maintenance Costs: This is the key difference from a double net lease. The tenant is responsible for the day-to-day maintenance and repairs of the property, which can include things like:

  • Routine upkeep (landscaping, snow removal, janitorial services)

  • HVAC system repairs and replacements

  • Parking lot maintenance Interior and exterior repairs

Meanwhile, in a triple net lease, the landlord's responsibilities are significantly reduced. The landlord is typically only responsible for:

• Mortgage Payments: If the property has a loan, the landlord makes the mortgage payments.

• Major Structural Repairs: In some cases, the landlord may remain responsible for major structural components like the roof and foundation, but this is often negotiated and can be a point of discussion. An "absolute triple net lease" would see the franchisee (tenant) take on all responsibility, including the roof and structure.

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

• Advantage - Lower Base Rent: In exchange for taking on the additional expenses, the tenant typically pays a lower base rent than they would in a gross lease.

• Advantage - Greater Control and Flexibility: The tenant has direct control over the property's maintenance and appearance. This allows them to hire their own contractors, manage their own costs, and make property improvements to suit their business needs without needing landlord approval for every decision.

• Advantage - Potential Tax Deductions: As a business expense, the tenant's payments for property taxes, insurance, and maintenance may be tax-deductible.

• Advantage - Long-Term Stability: A long-term lease provides the tenant with security for their business operations and allows them to invest in the location with confidence.

• Disadvantage - Variable and Unexpected Costs: The tenant is exposed to the risk of fluctuating expenses. If property taxes or insurance premiums increase unexpectedly, the tenant's costs will rise. Unforeseen major repairs, like a burst pipe or a new HVAC system, can also be a significant financial burden.

• Disadvantage - Responsibilities of a Landlord: The tenant takes on the responsibilities and liabilities of a property owner without actually owning the asset.

• Disadvantage - No Ownership Stake: The tenant is paying for maintenance and repairs, but they are not building equity in the property itself. This can feel like throwing money at a problem that is not theirs in the long run.

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