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

Before you buy a franchise in Ontario, the franchisor is normally required to give you a detailed disclosure document. It is the main tool you have to understand what you are buying. But the law carves out some sales where that duty does not apply.

This article walks through those exemptions in plain words, explains what protection you keep when one applies, and compares it with the cancellation rights you get when disclosure was required but went wrong. Whether an exemption really fits your deal depends on the facts, so it is worth confirming with a lawyer.

The general rule: disclosure at least 14 days ahead

Under s. 5(1) of the Arthur Wishart Act (Franchise Disclosure), 2000, 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, and the franchisor must give a written statement of any material change as soon as practicable and before you sign or pay. It covers information about the franchisor, such as its background, litigation history, bankruptcy or insolvency information and financial statements, along with offer information such as costs, the proposed agreements, territory, supplier restrictions, termination, renewal and transfer conditions, and a list of current and former franchisees.

The s. 5(7) exemptions

Section 5(7) of the Act lists the sales where the disclosure duty does not apply. The main ones are below.

• Resale by an existing franchisee: no disclosure is needed if the seller is not the franchisor, its associate, or a director, officer or employee of either, the sale is for the seller's own account, a master franchise is sold in its entirety, and the sale is not effected by or through the franchisor. Resales have their own treatment, so check them separately.
• Additional franchise: 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.
• Renewal or extension: no disclosure is needed if there is no interruption in operation and no material change.
• Sale by an executor, administrator, sheriff, receiver, trustee, trustee in bankruptcy or guardian on behalf of someone other than the franchisor.
• Franchisor insiders: 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.
• Fractional franchise: O. Reg. 581/00 s. 8 sets the percentage at 20 per cent of the business's first-year sales.
• Small investment: a total initial investment of no more than $15,000.
• Large investment: a total initial investment greater than $3,000,000.

These thresholds come from O. Reg. 581/00, which can be amended. Confirm the figures against the current version of the regulation before you rely on them.

Large franchisors and financial statements

A separate, narrower rule lets some franchisors leave financial statements out of the disclosure document. Under O. Reg. 581/00 s. 11, the franchisor must meet four tests.

• A consolidated net worth of at least $5,000,000, or at least $1,000,000 if it is 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 of continuous experience in the line of business.
• No fraud or franchise-law judgments in those five years.

This only removes the financial statements. The rest of the disclosure document is still required.

What you still have when an exemption applies

No disclosure document does not mean no protection. Several parts of the Act apply to franchise relationships regardless.

• Fair dealing: every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement, including acting in good faith and in accordance with reasonable commercial standards.
• Association rights: a franchisor cannot prohibit or restrict franchisees from forming or joining an organization of franchisees, or penalize them for doing so.
• No waivers: any purported waiver or release of your rights under the Act is void.
• Ontario law and courts: a clause restricting the application of Ontario law, or moving jurisdiction or venue outside Ontario, is void for claims enforceable under the Act.

Whether the damages claim for misrepresentation or non-compliance with s. 5 helps you in an exempt sale depends on the facts, because it is tied to a disclosure document or to a failure to comply with s. 5.

Cancellation rights when disclosure was required

If disclosure was required, the Act gives you a way out when it goes wrong. The table compares the two cancellation windows.

The notice must be in writing and delivered to the franchisor personally, by registered mail, by fax, or by another prescribed method. Within 60 days of the effective date of rescission, the franchisor or its associate must refund money received (other than money for inventory, supplies or equipment), buy back inventory, supplies and equipment at the purchase price, and compensate you for certain losses. How these rights apply to your franchise depends on your situation, so it is worth confirming with a lawyer.

What to do next

• Ask the franchisor in writing whether it says an exemption applies, and which one.
• Check the facts behind that claim, such as your total investment, the seller's role, or your history with the franchisor.
• Confirm the current thresholds in O. Reg. 581/00.
• Do not sign or pay anything until a lawyer has reviewed the agreement and any waiver or release clause.
• If you think disclosure was required but late or missing, note the dates you received documents and get advice quickly, because the deadlines are short.

Frequently asked questions