Tailoring Disclosure Documents For The Purpose Of Franchise Renewals

Franchisors generally understand, and comply with, their statutory obligation to provide prospective franchisees with a compliant disclosure document in those provinces that have franchise legislation requiring them to do so (Alberta, Ontario, Manitoba, New Brunswick and Prince Edward Island). In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 200, c. 3 (the "Act"), requires franchisors to provide a prospect with a disclosure document not less than 14 days before the earlier of the signing by the prospective franchisee of the franchise agreement or any agreement related to the franchise and the payment of any consideration in relation to the franchise. The Act and the General Regulation published under it (O. Reg. 581/00) set out a menu of documents and other information that must be included in the disclosure document.

A disclosure document must also contain all material facts as that term is defined in the legislation. In this regard, the courts have interpreted the franchisor's obligation to include documents and information relevant to the specific franchise being offered to a prospect that is current to the date the disclosure document is delivered. In light of these decisions, it is clear that a one-size-fits-all approach is no longer viable. Franchisors have accordingly tailored their standard form disclosure documents to the particular realities of the location in question in order to avoid the potentially harsh consequences of failing to provide a compliant disclosure document. To accomplish this, franchisors typically prepare a standard form disclosure document that contains the documents and information that apply to all of their franchisees and attach, as schedules or addenda, other items that are relevant only to the franchise in question.

Similar considerations apply to franchise renewals. Generally speaking, the Act requires a franchisor to provide a renewing franchisee with a disclosure document if there has been a material change, as that term is defined, since the original grant of the franchise or the latest renewal. Given the lengthy term of most franchise agreements, many franchisors assume that material changes have occurred between the original grant and the renewal and provide renewing franchisees with an updated or new disclosure document. They do so for a number of reasons. The term of a franchise agreement typically ranges anywhere from two to 15 years or more. It is safe to assume that changes have occurred in the franchisor's business, the system itself or the location over the life of the original agreement. In addition, franchisors often require a renewing franchisee to sign the form of franchise agreement in use at the time of renewal that may contain terms that are significantly different from the previous agreement, which individually or cumulatively could constitute a material change. While a franchisor might be able to avail itself of a statutory exemption, the prudent course of action is to provide a current disclosure document to each renewing franchisee.

Franchisors should therefore adapt their standard form disclosure documents or prepare a new template disclosure documents that are purpose built for renewals. Not all aspects of a disclosure document aimed at prospective franchisees are relevant to those that are simply renewing. Standard form language that is irrelevant or potentially misleading in the context of a renewal should therefore be deleted or revised accordingly. For example, a renewing franchisee may or may not be required to pay a fee upon renewal. The amount may differ from that charged to a new franchisee. Other financial terms may also be different in the context of a renewal. The renewal disclosure document must be amended to reflect those differences.

Particular consideration should be given to any changes in the territorial rights of a renewing franchisee. Given the often lengthy duration of a franchise agreement, franchisors may, at the time of any renewal, offer new franchisees a much more circumscribed bundle of territorial rights. Franchisors may reserve to themselves the right to market their goods and services through alternate distribution channels, such as the Internet, or under different trademarks and trade names, either inside or outside of a protected territory. These types of changes are generally unwelcome to renewing franchisees. If certain territorial rights are to be grandfathered into the renewal franchise agreement in order to retain successful and profitable franchisees, they must also be included in the renewal disclosure document.

Franchisees may be required to renovate their business premises or upgrade their equipment upon renewal. The associated costs, which could differ significantly from the costs associated with the establishment of a new franchise, must be included in the disclosure document. In cases where franchisors provide estimates of annual operating costs or earnings projections, the disclosure document should be amended to take into account the historical performance of the renewing franchise. Franchisors may or may not offer supplementary training to renewing franchisees to orient them to new systems and protocols. That training may differ from the training offered to initial franchisees. Again, the renewal disclosure document must be amended to provide renewing franchisees with relevant and accurate information.

Attention must also be paid to material facts and documents that are unique to the franchise to be renewed. For example, the head lease and sublease for the business premises should be referred to in and appended to the renewal disclosure document. There are myriad other franchise specific facts that will need to be included in both initial and renewal disclosure documents. It is therefore essential that those charged with drafting disclosure documents prepare templates that can be readily adapted to accommodate provisions that may be different for renewals as well as those facts and documents that are relevant to the franchise in question.

This is a brief outline and one of a series of articles designed to assist franchisors in understanding some of the issues faced by them. Careful planning, coupled with expert legal and financial advice, is essential to ensure the success of any franchise system. Mr. David Kornhauser, one of the lawyers behind the website www.franchisingforum.ca, provides advice franchisors about franchise law to in Toronto, Ontario or elsewhere across Canada. You can reach Mr. Kornhauser either at or david@franchisingforum.ca.

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