Franchise Lease and Personal Guarantee Risks in Ontario

For many franchise buyers, the lease is the largest commitment of all. It can run for years, and the franchisor may ask you to sign it, or a sublease of it, along with a personal guarantee. The risk often falls on your home, savings and family, not only on the business.

This article explains the exposure in plain terms and what to look at before you sign. Lease and guarantee wording varies a great deal, so the details of your own documents matter more than any general summary.

What a personal guarantee means

A personal guarantee is your own promise to pay what the business owes if the business does not. If the franchise is run through a corporation, the corporation is normally a separate legal person, and a guarantee is how a landlord or franchisor reaches past it to you personally.

The key questions are how much you are promising, for how long, and for what. Some guarantees are limited in amount or time. Others cover rent, taxes, repair costs and other charges for the whole term, including renewals. Read for words like unlimited, continuing and joint and several.

Direct lease or franchisor head lease

In some franchise systems you sign a lease directly with the landlord. In others the franchisor holds a head lease and you sign a sublease with the franchisor. Each arrangement shifts risk differently.

Ask whether the lease and franchise agreement are linked. If the franchise agreement ends, you want to know whether you remain responsible for the rest of the lease term, and who can use the space afterwards.

Where disclosure and good faith fit in

The franchisor must give you a disclosure document at least 14 days before you sign the franchise agreement or any related agreement, or pay any consideration, and it must include draft agreements. Whether a particular lease, sublease or guarantee counts as a related agreement depends on its terms and the parties, so ask a lawyer rather than assuming.

The franchisor must also disclose any material change before you sign or pay. If you are asked to sign a lease or guarantee on terms that differ from the drafts you were given, raise it straight away.

Every party to a franchise agreement must act in good faith, and a breach lets the other party sue. If disclosure was late, deficient or never given, you may have rescission rights, which run for 60 days or two years depending on the situation. How these protections apply to a lease or guarantee you are asked to sign depends on your situation, so it is worth confirming with a lawyer before you sign.

What to negotiate before you sign

You may not win every point, particularly in a large system with standard forms. Still, it is reasonable to ask, and a landlord or franchisor will sometimes move on the items below.

• A cap on the guarantee, in dollars or in months of rent.
• A fixed end date, or a release after a set number of years of on-time payment.
• A guarantee limited to rent, rather than every charge under the lease.
• No guarantee of renewal terms unless you actually exercise the renewal.
• A right to assign or sublet the premises if you sell the franchise, with the guarantor released on a proper transfer.
• Clear rules on who pays for leasehold improvements, build-out and equipment.
• A lease that is conditional on financing, permits and zoning for a restaurant use.
• If your spouse or family member is asked to guarantee, separate legal advice for that person.

What to do next

• Get the full lease, any head lease, and the draft guarantee, not only a summary.
• Ask for the documents early enough to review them within the disclosure period.
• Have a lawyer read the lease, guarantee and franchise agreement together, since terms in one may affect the others.
• Have an accountant stress-test your budget against the total rent and other lease charges over the whole term.
• Keep copies of everything you sign and any promises made about the premises.
• Do not sign a lease or guarantee under time pressure from a landlord or franchisor without advice.

Frequently asked questions