Franchise location practice challenged by recent ruling

An Ontario Superior Court of Justice rule "may change the game for franchisors and franchisees alike if it's not overturned"

By
Western Investor
November 9, 2016





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As reported by BetheBoss (betheboss.ca), a recent Ontario Superior Court of Justice ruling may have a significant impact on the practice of franchise location selection after an agreement has been signed.

Currently, many franchisors grant a franchise before the actual location is decided. Disclosures include real estate lease and development cost ranges, but these are only estimates. After the disclosure has been made and the franchisee signs the agreement, both parties work together to find a location they’re both satisfied with. This is generally done for business reasons, as the franchisor doesn’t want to end up stuck in a lease for a location after a franchisee backs out. If no suitable location is found within a specific amount of time, the franchisee is usually entitled to opt out of the deal under the terms of the signed agreement.

The recent Ontario court decision questions this very practice. In this case, a franchisee sued a franchisor for the cancellation of their franchise agreement, and the basis of their argument was the franchise disclosure they received.

The franchisees argued the disclosure was insufficient because it didn’t include adequate estimates of the location development costs or a copy of the primary lease, the latter being impossible because a location hadn’t been chosen when the disclosure was delivered. Although it was disclosed that the franchise location was to be determined after signing in the agreement itself, the court ruled in favour of plaintiff’s claim for cancellation based on those reasons. The franchisor in this case is appealing the ruling, but for now, franchisors may need to exercise caution when signing agreements without pre-selecting locations.

Some have cautioned this case could be used by unscrupulous franchisees to claim rescission if an unexpected “material fact” arises after the franchise agreement has been signed.

“It’s too early to tell what impact the Ontario court ruling will have on franchise location selection, but it does have the potential to change the game for franchisors and franchisees alike if it’s not overturned,” BeTheBoss noted in its report.


Frank O'Brien is the editor of Western Canada's biggest commercial real estate newspaper, Western Investor, as well as a contributing editor at West Coast Condominium, real estate contributor to Business in Vancouver and a regular media commentator on real estate investment.
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