An Existing Franchisee has Provided Notice to the Franchisor that it Wishes to Extend the Term of its Franchise Agreement, is the Franchisor Required to Deliver a Disclosure Document to this Franchisee prior to entering into an Agreement Extending the Term of the Franchise Agreement?
That depends. Section 5(7)(f) of the Arthur Wishart Act (Ontario's franchise legislation) provides an exemption to the franchisor's obligation to deliver a disclosure document provided that: a) there has been no interruption in the franchisee operating the business; and b) there has been no material change since the franchise agreement or latest renewal/extension was entered into.
Material change is broadly defined in the Arthur Wishart Act to be, a change in the business, operations, capital or control of the franchisor or franchisor's associate, a change in the franchise system or a prescribed change, that would reasonably be expected to have a significant adverse effect on the value or price of the franchise to be granted or on the decision to acquire the franchise and includes a decision to implement such a change made by the board of directors of the franchisor or franchisor's associate or by senior management of the franchisor or franchisor's associate who believe that confirmation of the decision by the board of directors is probable.
There is an exemption to delivering a disclosure document to continuing franchisees when the term of the franchise agreement is being renewed/extended. However, if any change has occurred, whether the change was to the franchise agreement, the business operations, the franchisor, the system etc., regardless that the franchisor does not perceive the amendment to be a material change, it would be prudent for the franchisor not to rely on this exemption and deliver to the franchisee a disclosure document in accordance with the Arthur Wishart Act. It is not worth the franchisor taking the risk of the franchisee subsequently asserting that a material change occurred and therefore the franchisor failed to deliver to the franchisee a disclosure document in accordance with the Arthur Wishart Act. The Arthur Wishart Act provides prospective franchisees with the right to rescind a franchise agreement, for a period of two years from entering into the franchise agreement, if the franchisor never provided it with a disclosure document.
Understanding franchise law is crucial for both franchisors and franchisees/prospective franchisees. The complexities of franchise agreements, disclosure requirements, and regulatory compliance demand careful consideration and expert guidance. By staying informed about the key aspects of franchise law, businesses can navigate the legal landscape more effectively, ensuring that their franchise operations are both legally sound and successful. For anyone involved in the franchise industry, remaining updated on legal developments and seeking professional advice can make a significant difference in achieving long-term success.
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