In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires franchisors to give prospective franchisees a disclosure document—a significant amount of written, pre-sale information about the franchisor and its system. Certain portions of the content are prescribed in the Act, but franchisors are also required to disclose all “material facts”, whether prescribed or not.
“Material fact” is defined in the Act as including “… any information about the business, operations, capital or control of the franchisor or franchisor’s associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise.” Further, the Act states that a “disclosure document must contain “all material facts, including material facts as prescribed”.
Too often, disclosure documents contain only the material facts about the franchise system in general. Court decisions have recognized that a franchisor who grants franchises in Ontario must also disclose information specific to the franchise location being acquired in addition to disclosure about the franchise system in general.
In one recent case, the Ontario Court of Appeal examined whether the disclosure document that had been delivered to the appellant franchisee was so deficient as to amount to no disclosure having been provided to the franchisee. In examining the numerous alleged deficiencies with the disclosure document, the Court considered whether one of these deficiencies (the franchisor’s failure to provide a copy of the head lease) was a “material” deficiency. Site-specific information (i.e. the head lease) is not listed in Regulations to the Act as a prescribed material fact, but in this case it was deemed to be a material fact that should have been disclosed.
After noting that the franchisee in this case was expected to accept all the terms and obligations of the head lease and to be bound by them, the judge stated: “…to suggest, in these circumstances, that the head lease is not material and that there is no obligation to disclose it under the Act is absurd. It is obviously material and required to be disclosed.” The Court’s reasoning in this case amounted to an endorsement for the requirement to disclose information relevant to a specific site.
In another case, the Court examined seven different deficiencies in a disclosure document and concluded that they were all material deficiencies. Several were specific to the franchised location: the disclosure document did not disclose the location of the franchised business, the territory in which the grant of the licence applied, the purchase price and closing date of the agreement of purchase and sale, and the lease and sublease. In a more recent case, the Court stated that: “there is no disclosure at all in the disclosure document about any facts specific to the location being purchased as distinct to disclosure about the defendants’ franchise system in general.” Unfortunately, the Court in this case did not expand on what it considered to be site-specific information, noting only that the proposed sublease and head lease to the franchise premises were not included with the disclosure provided to the franchisee.
While it remains to be seen whether the Courts will offer further guidance on the issue of site-specific disclosure or just expand the list of site-specific items that should be included in disclosure documents on a case-by-case basis, it is clear that franchisees are entitled to material information specific to the location. In the appropriate context, such as a resale of an existing franchise, a franchisee may be entitled to receive historic sale figures and financial statements of the existing franchise location being sold–information that is not otherwise “prescribed” by the Regulations.
It is imperative that disclosure documents not only be drawn up with the advice of an experienced franchise lawyer, but that franchisees investigating a franchise opportunity consult with an experienced franchise lawyer before investing their money in a franchise to be certain they obtain all material facts.
Louis Vouloukos practises franchise and commercial law at Lawrences. He can be reached at (905) 452-6883 or lvouloukos@lawrences.com.
This article was first posted on www.betheboss.ca/.