When The Lease Comes Due: The Legal Exposure Behind Rising Renewal Rents

As published in Canadian Franchise Association

Context: Rental rates, consumer trends, and restaurant profitability

Between 2019 and 2024, Toronto retail rents increased approximately 142 per cent, rising from roughly $19 per square foot to nearly $50 per square foot.¹ The Toronto Regional Real Estate Board’s (TRREB) Q4 2025 Commercial Report records commercial and retail average net lease rates at $29.97 per square foot, up 18.3 per cent year-over-year.² CBRE Canada’s H2 2025 Canada Retail Rent Survey confirms this isn’t a Toronto-specific phenomenon. Rental appreciation is accelerating across 11 Canadian markets at more than double the pace recorded just six months earlier.³

Against that backdrop, the Restaurants Canada Q1 2026 Quarterly Report found that 81 per cent of quick-service restaurant operators reported declining profitability. It was the hardest-hit segment in the entire food service industry, faring worse than full-service restaurants at 70 per cent.^[4] Across the industry more broadly, 36 per cent of all restaurant operators are operating at a loss or at break-even.⁴

Rather than trading down to Quick-Service Restaurant (QSR), Canadians facing affordability pressures are cutting restaurant visits altogether. Angus Reid polling cited in the same report found that reducing dining out and cutting takeout orders were the top two cost-reduction mechanisms Canadians are using.^[4] The sector positioned as the accessible option has become the first casualty of consumer retrenchment.

The cohort of Canadian QSR franchise leases executed between 2013 and 2016 is now at or approaching its first renewal term. These operators entered into 10-year agreements in a rental environment that bears almost no resemblance to the one they are renewing into today, against a landlord whose market position has moved materially in that landlord’s favour, while carrying the accumulated effect of every cost pressure described above.

The financial reality: The numbers that don’t add up

The financial tolerances within which QSR franchise units operate are narrower than they may appear. In addition to labour and employment costs, franchisees carry royalty and marketing fund obligations on top of occupancy costs. By the time a franchisee reaches the renewal table, the margin available to absorb a higher rent has already been eroded by those other obligations.

A renewal-stage rent increase of 20 to 35 per cent breaks the unit model. Most franchisees arrive at the renewal table already unable to absorb the ask, many without recognizing as much, until the landlord’s offer is in front of them.

The legal landscape: What the lease says, and what it produces

A standard renewal option in a commercial lease grants the tenant the right to extend the term at fair market rent, determined first by negotiation and, failing agreement, by arbitration. In Ontario, where the lease doesn’t specify an alternative procedure, arbitration is governed by the Arbitration Act, 1991, which may include a formal hearing, exchange of evidence, and a binding award, typically taking months and carrying significant legal costs for both parties.

For a QSR franchisee, that process is hard to live with since, the location can’t close while a rent dispute is resolved, and the tenant must keep paying the disputed rent throughout. Most franchisees accordingly settle rather than arbitrate, which means the rent they ultimately pay is usually a number reached under time pressure rather than the result of an informed, arms-length process.

There is a second, more serious risk. Many franchisees have never read their option clause and don’t know whether notice must be in writing, how far in advance it must be given, or whether the notice period has already passed. A missed notice deadline, absent exceptional circumstances, extinguishes that right altogether. At that point, the tenant is no longer negotiating rent under the lease, but asking the landlord for an extension it’s not entitled to, with no leverage to compel one.

Risk for the franchise system: The franchisor’s stake in this problem

A franchisee operating at a loss creates exposure well beyond its own unit. Operators in financial distress defer maintenance, reduce staffing, and compromise product quality in ways that erode the brand equity the franchisor has spent years building. Yet, the franchisor’s stake in the lease goes beyond reputation. It’s structural and follows from how the lease and the franchise agreement are typically arranged.

In a head lease arrangement, the franchisor is the named tenant and the franchisee occupies under a sublease or license. This means the franchisor deals with the landlord directly and holds the renewal right while the franchisee has no relationship with the landlord at all. In a direct lease arrangement, the franchisee is the named tenant, but the franchisor commonly holds a step-in right, often set out in a tripartite agreement with the landlord. This allows the franchisor to assume the lease and the renewal if the franchisee defaults or the franchise agreement ends. Either way, the franchisor has a real commercial interest in the lease, and in the head lease case, a direct obligation to manage the renewal with the landlord. A franchisor who treats the renewal as solely the franchisee’s problem is, in many systems, simply wrong about who the lease actually obligates.

Under the Arthur Wishart Act (Franchise Disclosure), 2000, and equivalent provincial legislation, a franchise disclosure document (FDD) must be delivered on the initial grant of a franchise and subject to a narrow exemption, on a resale, transfer, or renewal of an existing franchise. Where the franchisor holds the head lease or a step-in right, and that lease is renewing into a market that has moved sharply against the tenant, bears directly on what the incoming or continuing franchisee is taking on. Whether failing to disclose it amounts to withholding a material fact has not yet been tested in Canadian franchise litigation, but the conditions for that question are increasingly common.

How to negotiate proactively: Key lease terms

The most effective intervention in the renewal economics problem is during the original negotiation, when the franchisee, or the franchisor in a head lease structure, has leverage that won’t exist a decade later.

Three lease provisions have material consequences in the renewal context and should be carefully considered:

1. A cap on annual taxes, maintenance, and insurance cost escalation should apply during both the initial term and any renewal term.
2. A fixed-formula renewal option, in which rent is determined by reference to a defined index or a fixed escalation rather than by reference to market, eliminates fair market rent uncertainty entirely. Landlords will resist this on longer terms, but it’s achievable on shorter ones and worth pursuing.
3. Rather than arbitration, a dispute resolution mechanism that engages a professional appraiser and the submission of professionally prepared rental comparison reports will ultimately reduce the time and cost of resolving a rent disagreement at renewal.

Navigate existing renewal options: What to do with the leases already signed

None of this helps the franchisor whose 2015 lease has none of these provisions and whose renewal is looming. For that franchisor, the question becomes how to manage the renewal that’s coming under the terms that already exist. Here are three steps to do so.

Step one

First, before any lease comes up for renewal, find out exactly what the option clause requires: whether notice must be in writing, how far in advance, whether the right lapses automatically if the deadline passes, and the conditions attached to renewal, because the answer determines what happens next.

If the notice date has not passed, the tenant still holds an enforceable contractual right. The notice should also be served in the form and manner the lease requires without delay. If the date has already passed, the analysis changes entirely. The tenant’s options narrow to whatever equitable relief a court might grant, and Ontario courts grant that relief sparingly and only on specific facts. That question should be assessed by counsel before any approach is made to the landlord, because what’s said to the landlord at that stage can affect the argument later.

Step two

Put a request to the landlord in writing, well before the deadline, asking for the basis of any rent proposal. A documented, timely request becomes part of the record if the matter later evolves into a dispute or proceeds to litigation.

A landlord who receives that request before issuing a number is dealing with a tenant who has preserved its position. In comparison, a landlord who receives a counteroffer only after already naming a figure is dealing with a tenant negotiating from behind.

Step three

Lastly, for franchisors specifically, complete an annual portfolio review. A franchisor with visibility into multiple franchisee leases approaching renewal in the same window should be assessing which locations face the most severe mismatch between current rent and likely market rent. They should also be having that conversation with the affected franchisees before the landlord does. A franchisee who hears about the renewal exposure from the franchisor, with some preparation, is in a fundamentally different position than one who hears about it for the first time from the landlord’s leasing manager.

Cost to the landlord: Why the landlord’s interests point the same direction

A vacant purpose-built QSR shell is one of the harder spaces to re-tenant in commercial retail. The mechanical and ventilation infrastructure built for food service is expensive to remove and rarely useful for anything else. Also, the income gap during vacancy, together with the cost of converting the space, often exceeds the rent premium the landlord was chasing in the first place. CBRE Canada’s H2 2025 survey notes that while most tenants are renewing despite significant increases, some spaces are coming back to market where the economics simply don’t work.^[3] With 81 per cent of QSR operators already reporting declining profitability, the pool of replacement tenants is thinner than it’s been in years.

That gives both sides a reason to solve this together rather than treat the renewal as a one-sided extraction. A longer term at a lower annual escalation, a tenant improvement allowance applied against the increase, or a phased step-up rather than a single jump would allow the tenant’s unit economics to catch up rather than break immediately. None of this requires the landlord to absorb the cost pressure described in this article. It requires the landlord to recognize that a number of tenants cannot pay ends in a vacancy, merely a delayed one.

For franchisors and franchisees navigating this market, the renewal is the point at which a decade of lease drafting, disclosure practice, and portfolio oversight either holds up or does not. Aggressive negotiation will matter less here than preparation. The ones who come through this cycle intact will be those who knew, from the day the lease was signed, exactly what it required of them and when.

Footnotes

^{1. Toronto Regional Real Estate Board (TRREB) / 6ix Retail, “When Rent Becomes Unsustainable: Toronto Retailers Navigate the Fixed Cost Crunch,” January 14, 2026, citing TRREB data (2019–2024).}

^{2. Toronto Regional Real Estate Board (TRREB), Commercial Market Report, Q4 2025, published April 27, 2026.}

^{3. CBRE Canada, Canada Retail Rent Survey H2 2025, published January 22, 2026.}

^{4. Restaurants Canada, Q1 2026 Quarterly Report, May 2026; as reported by FoodNX, “Restaurants Struggling with Higher Costs: Report,” May 15, 2026.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.