Commercial Leases for Franchise Businesses in Ontario: What Franchisees Should Review Before Signing

Franchise businesses in Ontario are often structured around two core legal documents: the franchise agreement and the commercial lease. While many prospective franchisees focus primarily on the franchise agreement, the lease can create equally significant and, in some cases, more immediate financial risk.

Unlike the franchise agreement, which governs the operational relationship with the franchisor, the commercial lease governs the franchisee’s obligation to occupy and pay for the premises. These obligations often continue regardless of how the franchise performs.

Because of this, the lease and the franchise agreement should not be reviewed in isolation. The interaction between these documents can have a direct impact on the long term viability of the business.

The Structural Relationship Between the Lease and the Franchise Agreement

Franchise systems typically structure real estate arrangements in one of several ways, each of which carries different legal implications.

In some cases, the franchisee leases directly from the landlord. In others, the franchisor holds the head lease and grants a sublease or license to the franchisee. In certain systems, the franchisor does not hold the lease but retains approval rights over the location and lease terms.

Each structure affects:

• the degree of control exercised by the franchisor

• the ability of the franchisee to negotiate lease terms

• the allocation of risk between the parties

Where the franchisor is involved in the lease, the franchisee may have limited ability to negotiate key provisions, even though the financial obligations ultimately rest with the franchisee.

Lease Obligations Continue Even if the Franchise Fails

One of the most significant risks for franchisees is that lease obligations often continue even if the franchise agreement is terminated.

For example, a franchise agreement may be terminated due to:

• operational non compliance

• financial underperformance

• breach of system standards

However, unless the lease is structured to terminate simultaneously, the franchisee may remain responsible for:

• base rent for the remainder of the lease term

• operating costs and additional rent

• repair and maintenance obligations

This creates a situation where the business is no longer operating under the franchise, but the financial obligations under the lease continue.

This risk is often underestimated at the time of signing.

Personal Guarantees and Layered Liability

Commercial leases for franchise locations frequently include personal guarantees from the business owner.

These guarantees are often separate from any obligations under the franchise agreement and may expose the individual to personal liability for:

• unpaid rent

• operating costs

• damages arising from default

• legal costs associated with enforcement

In many cases, franchisees are subject to layered liability, meaning:

• obligations under the franchise agreement

• obligations under the lease

• personal liability under the guarantee

These obligations can exist simultaneously and continue even if the business ceases operations.

Control Over Location and Lease Terms

Franchisors often exercise control over the location of the franchise business to maintain brand consistency and market positioning.

This control may extend to:

• approval of the premises

• approval of lease terms

• restrictions on relocation

• requirements relating to visibility, signage, and layout

While these controls serve the franchisor’s broader system strategy, they may limit the franchisee’s ability to:

• negotiate favourable lease terms

• select alternative locations

• adjust to changing market conditions

As a result, franchisees may enter into lease arrangements that prioritize system requirements over individual business considerations.

Assignment and Exit Constraints Across Both Agreements

Exiting a franchise business typically requires navigating both the franchise agreement and the commercial lease.

Even if the franchise agreement permits assignment or sale of the business, the lease may impose additional conditions.

These may include:

• landlord approval of the incoming tenant

• financial qualification requirements

• payment of assignment or consent fees

• execution of new lease documentation

If the lease is more restrictive than the franchise agreement, it may limit the ability to complete a sale or transfer.

In practice, both agreements must be aligned to facilitate a viable exit strategy.

Build Out Obligations and Capital Risk

Franchise businesses often require significant initial investment to meet brand standards.

This may include:

• construction and renovation of the premises

• installation of specialized equipment

• signage and branding requirements

• compliance with franchisor specifications

The lease will typically determine:

• who is responsible for construction costs

• whether any tenant improvement allowances are provided

• whether improvements must be removed at the end of the term

These capital investments are often sunk costs, meaning they may not be recoverable if the business underperforms or closes.

Misalignment Between Lease Term and Franchise Term

Another issue that arises in franchise leasing arrangements is misalignment between the lease term and the franchise agreement term.

For example:

• the lease may extend beyond the franchise agreement

• the franchise agreement may terminate earlier than expected

• renewal rights may not align between the two agreements

If these timelines are not coordinated, the franchisee may be left with ongoing lease obligations after the franchise relationship ends.

Ensuring alignment between these documents is an important part of risk management.

Why Legal Review of Both Documents Matters

Franchise agreements and commercial leases are often negotiated separately, but they operate together in practice.

Before signing, business owners may wish to obtain legal advice to ensure that:

• the lease and franchise agreement are properly aligned

• the financial obligations across both documents are understood

• risks associated with termination and exit are identified

• the structure supports the long term viability of the business

A coordinated review of both documents can help identify issues that may not be apparent when each agreement is considered independently.

Speak With a Lawyer Before Signing a Franchise Lease

Business owners considering a franchise location should carefully review both the franchise agreement and the commercial lease before signing.

If you are reviewing a franchise related lease in Ontario, you can Book a Consultation to discuss your situation and next steps.