Buying a Franchise From a Franchisee in Ontario: Disclosure Rights

You have found a franchise location for sale, and the person selling it is the current franchisee, not the franchisor. You may be wondering whether the franchisor still has to give you the formal disclosure package that a brand-new franchisee would receive.

In Ontario, the answer depends on the details of the resale. The Arthur Wishart Act (Franchise Disclosure), 2000 has an exemption for some resales, but it is narrow. This article explains how it works, what you are owed if it does not apply, and what you can do if disclosure is missing or defective.

The resale exemption under s. 5(7)(a)

As a rule, a franchisor must give a prospective franchisee a disclosure document. The exemption for resales lifts the disclosure duty only when all of the following are true.

• The selling franchisee is not the franchisor, its associate, or a director, officer or employee of either.
• The sale is for the franchisee's own account.
• If it is a master franchise, the entire franchise is being sold.
• The sale is not effected by or through the franchisor.

If even one condition is missing, the exemption does not apply. A resale can therefore look like a simple private sale and still carry full disclosure rights.

What "by or through the franchisor" can mean

The Act says the exemption applies only if the sale is not effected by or through the franchisor. How much involvement by the franchisor crosses that line depends on the facts of your deal, so it is worth confirming with a lawyer.

• Ask who introduced you to the seller and who is setting the terms.
• Keep emails and messages showing what the franchisor did in the process.
• Do not rely on a statement from the seller or franchisor that disclosure is not needed.

If the exemption does not apply: what you are owed

You must receive the disclosure document at least 14 days before the earlier of signing the franchise agreement or any other agreement relating to the franchise, or paying any consideration to the franchisor. It must be delivered as one document at one time. If something material changes, the franchisor must give you a written statement of the change as soon as practicable, and before you sign or pay.

Ontario's guidance says the document must include franchisor information and offer information.

A franchisor need not include financial statements if it meets four tests: a consolidated net worth of at least $5,000,000 (or $1,000,000 if controlled by a corporation worth at least $5,000,000), at least 25 franchisees in Canada at all times in the prior five years, five years' continuous experience in the line of business, and no fraud or franchise-law judgments in those five years.

Remedies when disclosure is late, defective or missing

• Late or deficient disclosure: you may rescind the franchise agreement without penalty or obligation no later than 60 days after receiving the disclosure document. This applies if the document or a material change statement came late, or the document did not meet the requirements.
• No disclosure at all: you may rescind no later than two years after entering into the franchise agreement.
• Notice: a notice of rescission must be in writing and delivered to the franchisor personally, by registered mail, by fax, or by another prescribed method.

After rescission, the franchisor or its associate has 60 days from the effective date to refund money received (other than money for inventory, supplies or equipment), buy back remaining inventory and supplies and equipment at the purchase price, and compensate you for losses in acquiring, setting up and operating the franchise, less those amounts.

You can also sue for damages if you suffered a loss because of a misrepresentation in the disclosure document or a material change statement, or because the franchisor did not comply with s. 5. The claim can be made against the franchisor, its agent, broker and associate, and every person who signed the disclosure document. A person is not liable if they prove you bought knowing of the misrepresentation or material change.

Other exemptions you may meet in a resale

A resale can fall under other exemptions, even if the main resale one does not fit. Each has its own conditions.

• Sales by an executor, administrator, sheriff, receiver, trustee, trustee in bankruptcy or guardian on behalf of someone other than the franchisor.
• A renewal or extension with no interruption in operation and no material change.
• An additional franchise to an existing franchisee that is substantially the same as the one already operated, with no material change.
• A grant to a person who has been an officer or director of the franchisor or its associate for at least six months, or a former one within four months.
• O. Reg. 581/00 thresholds: a fractional franchise set at 20 per cent of first-year sales, a total initial investment of no more than $15,000, or one greater than $3,000,000.

These thresholds come from a regulation that can be amended, so they should be re-checked against the current version before you rely on them.

Protections that apply either way, and next steps

Even when disclosure is not required, some protections remain. Every franchise agreement carries a duty of fair dealing on each party, including good faith and reasonable commercial standards. A franchisor cannot prohibit or restrict franchisees from forming or joining a franchisee organization, or penalize them for it. Any waiver or release of your rights under the Act is void, and any clause that restricts Ontario law or moves jurisdiction or venue outside Ontario is void for claims enforceable under the Act.

• Record how the franchisor was involved in the sale.
• Ask in writing whether a disclosure document will be provided.
• Note the date you receive any documents and the date you sign or pay.
• Have a lawyer review the agreement before you sign or pay anything.

Frequently asked questions