When Doesn't a Franchisor Have to Give You a Disclosure Document in Ontario?

You have found a franchise you like, and the franchisor or a seller has told you that no disclosure document is required. Sometimes that is correct. Often it is a shortcut that leaves you without the information, and the legal remedies, Ontario law gives most franchise buyers.

This article starts with the normal rule under Ontario's Arthur Wishart Act (Franchise Disclosure), 2000, then walks through each exemption in plain terms. It also explains what you give up if an exemption really applies, and what protections you still have.

The normal rule: 14 days and one complete document

A franchisor must give a prospective franchisee a disclosure document. You must receive it 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.

The document 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 after the change and before you sign or pay.

Ontario's guidance says the document must include information about the franchisor, such as its business background, litigation history, bankruptcy or insolvency information and financial statements. It must also cover the offer: costs, copies of the proposed agreements, any exclusive territory, supplier restrictions, volume rebate policy, termination, renewal and transfer conditions, training, advertising funds, and a list of current and former franchisees.

The exemptions based on who is selling

The Act lists situations where the disclosure duty does not apply. Several turn on who is granting the franchise and how.

• Resale by an existing franchisee: no disclosure is required if the seller is not the franchisor, its associate, or a director, officer or employee of either; the sale is for the franchisee's own account; for a master franchise, the entire franchise is sold; and the sale is not effected by or through the franchisor. If the franchisor is involved in making the sale, this exemption is in doubt.
• Additional franchise or renewal: no disclosure is required for an additional franchise granted to an existing franchisee that is substantially the same as the one already operated, if there has been no material change. The same goes for a renewal or extension with no interruption in operation and no material change.
• Sale by an executor, receiver or trustee: no disclosure is required when the franchise is granted by an executor, administrator, sheriff, receiver, trustee, trustee in bankruptcy or guardian on behalf of someone other than the franchisor.
• Franchisor insiders: no disclosure is required for a grant to a person (or their controlled corporation) who has been an officer or director of the franchisor or its associate for at least six months. A former officer or director qualifies if not more than four months have passed.

The exemptions based on size and financial strength

Ontario Regulation 581/00 sets thresholds that exempt some small and very large deals, and it relieves some large franchisors of one part of the document.

Separately, a franchisor need not include financial statements if it meets four tests. It must have 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). It must have had at least 25 franchisees in Canada at all times in the prior five years. It must have five years' continuous experience in the line of business. And it must have no fraud or franchise-law judgments in those five years.

This last one is narrower than the others. It only removes the financial statements. The rest of the disclosure document is still owed to you. The regulation's thresholds should also be checked against any later amendments before you rely on them.

What you lose, and what you keep, if an exemption applies

The Act's strongest buyer remedies are tied to disclosure. You can cancel the agreement within 60 days of receiving the document if it came late or did not meet the requirements, or within two years of signing if no document was ever provided. You can also sue for damages for a loss caused by a misrepresentation in the document, or by the franchisor's failure to comply with the disclosure rules. If a valid exemption applies, there is no disclosure failure to build those remedies on, so you should assume you do not have them.

Separately, any waiver or release of your rights under the Act is void. A clause that restricts the application of Ontario law, or moves jurisdiction or venue outside Ontario, is void for claims enforceable under the Act. A document you are asked to sign saying you do not need disclosure does not by itself create an exemption.

What to do next

If you have been told no disclosure is needed, ask which exemption is being relied on and why. A seller who cannot name one should be treated with caution. Before you sign or pay anything, work through this list.

• Ask the franchisor or seller, in writing, which exemption they rely on.
• Check whether the franchisor is involved in the sale, which matters for resales.
• Compare your total initial investment and expected first-year sales with the thresholds, and confirm they are current.
• Ask for the same information anyway: costs, agreements, territory, supplier rules and franchisee list.
• Get advice before signing any waiver or paying anything, since a purported waiver of your rights under the Act is void.
• Have a lawyer review the agreement and confirm whether an exemption really applies.

Frequently asked questions