- the franchisor grants the franchisee the right to sell, offer for sale or distribute goods or services that are substantially associated with a trade-mark, trade name, logo or advertising or other commercial symbol that is owned by or licensed to the franchisor or the franchisor’s associate, and
- the franchisor or the franchisor’s associate has the right to exercise or exercises significant control over, or has the right to provide or provides significant assistance in, the franchisee’s method of operation, including building design and furnishings, locations, business organization, marketing techniques or training, or
- the franchisor, or the franchisor’s associate, grants the franchisee the representational or distribution rights, whether or not a trade-mark, trade name, logo or advertising or other commercial symbol is involved, to sell, offer for sale or distribute goods or services supplied by the franchisor or a supplier designated by the franchisor, and
- the franchisor, or the franchisor’s associate, or a third person designated by the franchisor, provides location assistance, including securing retail outlets or accounts for the goods or services to be sold, offered for sale or distributed or securing locations or sites for vending machines, display racks or other product sales displays used by the franchisee.”
The definition of a “franchise” is defined in Alberta as: “a right to engage in a business;
- in which goods or services are sold or offered for sale or are distributed under a marketing or business plan prescribed in substantial part by the franchisor or its associate,
- that is substantially associated with a trademark, service mark, trade name, logotype or advertising of the franchisor or its associate or designating the franchisor or its associate, and
- that involves:
- a continuing financial obligation to the franchisor or its associate by the franchisee and significant continuing operational controls by the franchisor or its associate on the operations of the franchised business, or
- the payment of a franchise fee,
1.2 What laws regulate the offer and sale of franchises?
The Franchise Legislation regulates the offer and sale of franchises.
The primary purpose of Franchise Legislation is to protect franchisees by requiring franchisors to provide a disclosure document (“DD”) to prospective franchisees. In addition, the Franchise Legislation imposes the following obligations:
- Franchisors are obliged to provide prospective franchisees with a DD that includes certain statutory disclosures (found in the regulations) and material facts that would include any information about the business, operations, capital or control of the franchisor or its 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 sold, or the decision to purchase the franchise. The DD must include certain financial disclosures and also be accompanied by a certificate of disclosure from the franchisor that is signed by two officers or directors of the franchisor (or only one officer or director, if there is only one officer and director). This certificate of disclosure certifies that all of the contents in the DD are accurate, and has the effect of making the signatories to the certificate personally liable if anything in the DD is not true, or the DD contains a misrepresentation that causes a franchisee a loss.
- A duty of fair dealing on both the franchisor and the franchisee in the performance and enforcement of the franchise agreement, and a right of action for damages against the other party to a franchise agreement who breaches the duty of fair dealing. The duty of fair dealing includes, in all provinces with franchise legislation (with the exception of Alberta), a duty to act in good faith and in accordance with reasonable commercial standards.
- A right to associate with other franchisees and to form or join an organisation of franchisees, which prohibits the franchisor from interfering with or penalising a franchisee for doing so. Any provision in a contract that restricts this right is deemed to be void.
- A right of rescission if the DD is not provided during the prescribed time period or if it does not meet the requirements outlined in the Franchise Legislation and a right of action for damages if a franchisee suffers a loss due to a misrepresentation in the DD.
In Quebec, no legislation exists specifically to regulate the offer and sale of a franchise; however, the Civil Code of Quebec:
- Imposes a fundamental legal duty of good faith that:
- applies to both contractual and non-contractual dealings, including negotiation, performance and enforcement; and
- institutes a positive duty to inform the prospective franchisee of any material information.
- any abusive clauses or to reduce such provisions in scope; and
- any illegible or incomprehensible clauses, unless its is proven that an adequate explanation of the nature and scope of the clause was given to the adhering party.
The Charter of the French Language (“Charter”) also requires that all materials including contracts, operating manuals, and other materials and communications be available in French and with recent amendments to the Charter, the use of the French language is required.
1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a “franchisee” for purposes of any franchise disclosure or registration laws?
Yes; however, the Franchise Legislation in British Columbia, Manitoba, New Brunswick, Ontario and PEI do not apply to an arrangement arising from an agreement between a licensor and a single licensee to license a specific trademark, trade name, logo or advertising or other commercial symbol where the licence is the only one of its general nature and type to be granted by the licensor in Canada with respect to that trademark, trade name, logo or advertising or other commercial symbol. Franchisors relying upon this exemption should seek legal advice before doing so. The Franchises Act in Alberta does, however, apply in this situation.
1.4 Are there any registration requirements relating to the franchise system?
There are no registration requirements in Canada, but DDs do need to be made available to prospective franchisees in the Disclosure Provinces. Franchisees may be required, however, to register or obtain licences to establish and operate their franchised businesses.
1.5 Are there mandatory pre-sale disclosure obligations?
In the Disclosure Provinces, a franchisor is required to provide its prospective franchisees with a compliant DD at least 14 days before: 1) the franchisor and its associates and the franchisee sign any franchise agreement or related agreement (other than an agreement around a deposit); and 2) any consideration is paid to the franchisor (other than a deposit that, in some instances, meets the specific requirements of the Franchise Legislation). For example, in Ontario, the 14-day rule does not apply when there is an agreement for a deposit payment provided that it is less than 20% of the franchise fee and less than CAD$100,000 and is fully refundable. The DD must be up to date, must be particularised for the specific franchise offering, and must contain all material facts, a certificate of disclosure, financial statements (with some exceptions), copies of all proposed franchise and other agreements, and other required disclosures as outlined in the regulations. If there are any material changes since the date of the DD but before the franchise agreement is signed that should be disclosed to the prospective franchisee, the franchisor must disclose the material changes and can do so through the issuance of a statement of material change (“SMC”). The DD must be delivered as one document and at one time. There are various exceptions and exemptions included in the Disclosure Legislation.
1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?
Disclosure obligations also apply to sales to sub-franchisees. The master franchise would be required to make the prescribed disclosure to the prospective sub-franchisee. The Franchise Legislation in the Disclosure Provinces includes a sub-franchisor and a sub-franchisee in the definition of a franchisor and franchisee.
1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?
While there is no exact format prescribed by law or other regulation, the regulations in the Disclosure Provinces outline certain items that must be included in the DD and, in the case of some of the prescribed information in Ontario, the order in which the items must be included in the DD. Disclosures must contain all material information, and so a DD must be updated whenever there is any change in a material fact. There is no obligation to make continuing disclosure to existing franchisees; however, there would be an obligation to provide a new DD upon the renewal or extension of a franchise agreement where there has been a material change since the franchise agreement or the latest renewal or extension of the franchise agreement was entered into.
1.8 What are the consequences of not complying with mandatory pre-sale disclosure obligations?
Failure to provide the DD within the 14 days before entering into an agreement or an SMC before the earlier of paying any consideration to the franchisor or franchisor’s associate with the exception of a deposit, where and if prescribed by the regulations, or the prospective franchisee signing the franchise agreement or any other agreement relating to the franchise, or providing a DD that does not meet the legislative requirements, grants the franchisee a 60-day right of rescission to render their agreements with the franchisor void ab initio. Failure to provide a DD at all grants a franchisee a two-year right of rescission. A franchisee further has a right of action against a franchisor, its agent, broker, associate, or anyone who signs a certificate of disclosure for any losses it suffers as a result of a misrepresentation in a DD or an SMC or as a result of a franchisor not complying with the disclosure requirements.
1.9 Are there any other requirements that must be met before a franchise may be offered or sold?
If there are any changes to: 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, the franchisor must provide the prospective franchisee with an SMC. If there is a material fact that was not included in the DD, the franchisor may be required to provide the prospective franchisee with a new DD, which also resets the 14-day “cooling off” period. If the franchisor provides the prospective franchisee with a DD by electronic transmission, the franchisor must meet certain requirements as outlined in the regulations and should in any event request a written acknowledgment of receipt from the prospective franchisee.
1.10 Is membership of any national franchise association mandatory or commercially advisable?
Membership to a national franchise association is not mandatory. In Canada, the Canadian Franchise Association (“CFA”) serves franchisors and franchisees by providing resources to them. The CFA is the recognised authority on franchising in Canada and acts as the voice of the franchising community in Canada.
1.11 Does membership of a national franchise association impose any additional obligations on franchisors?
Franchisors are required to abide by the CFA’s Code of Ethics as a condition of membership in that association.
1.12 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?
There are two official languages in Canada – English and French. The majority of the population outside of Quebec speaks English. In Quebec, businesses must comply with the Charter, which requires that documents be available in French. The Charter will also impact the operation of a franchise in Quebec, by requiring that, among other things, all business names, signage, marketing, forms, employment agreements, etc. be in the French language.
2. Business Organisations Through Which a Franchised Business Can be Carried On
2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?
Regarding ownership and control of corporations by non-Canadians, the Investment Canada Act requires that non-Canadians file a notification each time they commence a new business activity in Canada and acquire control of an existing Canadian business, although some exceptions exist. Notifications are made via a PDF form to Innovation, Science and Economic Development Canada.
Corporations formed under most provincial corporate legislation, and the federal legislation called the Canada Business Corporations Act (“CBCA”), must have a minimum number of resident Canadians on their board of directors (often 25%). One recent exception to this is corporations formed under Ontario’s Business Corporations Act (“OBCA”). Such corporations are not subject to any requirements regarding Canadian representation on their boards.
2.2 What forms of business entity are typically used by franchisors?
Franchisors almost exclusively use corporations. In Canada, unlike the United States, there are no sub-types such as “S corps” and “C corps”. A Canadian corporation will always have a board of directors, officers, and shareholders, and will be considered a distinct legal person. Occasionally, limited partnerships or unli-
mited liability corporations are also used.
2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?
If the entity is created under the corporate legislation for the province in which it operates, such as the OBCA, then normally it will just require a business licence from each municipality it operates within, usually available through the applicable municipal government.
If the entity is not created under the corporate legislation for the province in which it operates, or is created under the CBCA, it will need an extra-provincial registration for the province in which it operates, available through the applicable corporate registry for that province.
3. Competition Law
3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises.
Canada’s Competition Act applies to most businesses, including franchises, and aims to ensure truthful, fair and legal business conduct to benefit consumers and foster innovation and economic growth. The Competition Act includes criminal offences: conspiracies (cartels) for price-fixing, market allocation and restricted supply agreements; bid-rigging; criminal false or misleading representations; deceptive telemarketing; pyramid selling schemes; and newly enacted wage-fixing and no-poach agreements between employers coming into effect June 2023. The Competition Act also includes civil reviewable matters: deceptive marketing practices (civil false or misleading representations, testimonials, product and performance claims, price claims, contests and drip-pricing); restrictive trade practices (refusal to deal; price maintenance; tied selling, exclusive dealing and market restriction; abuse of dominance, etc.); and mergers. The Competition Bureau administers the Competition Act. It is an independent law enforcement agency, led by the Commissioner of Competition, with broad investigative powers. Criminal offences may be prosecuted in the appropriate courts while reviewable matters may be pursued at the Competition Tribunal, an independent adjudicative body, or in certain courts. On June 23, 2023, amendments to the Competition Act came into effect that make it a criminal offence for two or more unaffiliated employers to conspire, agree or arrange to: fix; maintain; decrease; or control wages, salaries or terms and conditions of employment, or not solicit or hire each other’s employees.
3.2 Is there a maximum permitted term for a franchise agreement?
There is no maximum permitted term.
3.3 Is there a maximum permitted term for any related product supply agreement?
There is no maximum permitted term.
3.4 Are there restrictions on the ability of the franchisor to impose minimum resale prices?
A franchisor may impose minimum resale prices as long as the price maintenance provisions of the Competition Act are not violated. The Competition Bureau recognises that not all instances of price maintenance are anti-competitive. The Competition Act prohibits price maintenance that had, is having or is likely to have an adverse effect on competition in a relevant market. Whether the franchisor has market dominance is a factor in the competition effects analysis.
3.5 Encroachment – are there any minimum obligations that a franchisor must observe when offering franchises in adjoining territories?
Franchisors are generally unrestricted in offering franchises in adjoining territories. However, franchisors must adhere to disclosure requirements under the Franchise Legislation. In the Disclosure Provinces, the DD must outline policies regarding territorial exclusivity and identify the proximity between franchisees or other entities having rights to use the same trademarks.
3.6 Are in-term and post-term non-compete and non-solicitation of customers covenants enforceable?
Both in-term and post-term non-compete and non-solicitation clauses in franchise agreements may be found enforceable by an arbitrator or court in disputes between franchisors and franchisees regarding these restrictive covenants. Clauses that are unambiguous and reasonable are generally upheld. The reasonableness requirement is met when the temporal and territorial restrictions are sufficiently limited to protect only the legitimate interest of the party seeking to rely on the covenant. Such clauses must be carefully drafted to reduce conflict between franchisor and franchisee when their relationship ends.
4. Protecting the Brand and Other Intellectual Property
4.1 How are trade marks protected?
Canadian law recognises common law trademark rights acquired through use of the trademark in Canada. In some circumstances, a foreign trademark owner can establish trademark rights when a trademark has a significant reputation in Canada, even though the mark has not actually been used in Canada. Trademarks are also protected through registration, which is initiated either by filing an application directly with the Canadian Intellectual Property Office (“CIPO”), or by designating Canada in an application for an International Registration filed with the World Intellectual Property Office, pursuant to the Madrid Protocol.
The governing statute is the Trademarks Act, which is federal in scope. Significant amendments to the Trademarks Act were implemented in 2019 to align Canadian practice with several international treaties. The corresponding Regulations, as well as various Practice Notices issued by CIPO, should also be considered.
Trademarks can be enforced through proceedings for passing off and/or infringement. The superior court of a province has concurrent jurisdiction with the Federal Court of Canada with respect to wrongdoing arising in that province, but only the Federal Court has jurisdiction to consider the validity of a Canadian trademark registration. The Federal Court also has sole jurisdiction to consider appeals of decisions of CIPO’s Registrar of Trademarks. Such decisions can include refusing a trademark application, striking a trademark registration due to non-use, as well as decisions made pursuant to third-party opposition proceedings.
It is recommended that a franchisor carefully monitor the marketplace for confusingly similar marks so that timely action can be taken in the event of potential passing off/infringement of the franchise brand by others.
4.2 Are know-how, trade secrets and other business-critical confidential information (e.g. the Operations Manual) protected by local law?
While there is no statute that specifically covers confidential information, such information is recognised as being protectable pursuant to common law as long as certain criteria are met. In particular, the information must be kept confidential (meaning that it is not publicly disclosed) and reasonable steps must be taken to maintain its confidentiality. This is usually achieved by having recipients of the information sign agreements obliging them to maintain its confidentiality. Sometimes the recipient of the information owes a duty (such as a fiduciary duty to the disclosing party), in which case tort remedies can be relied upon in addition to contractual remedies for any breach. A franchisor should ensure that any franchise agreement explicitly refers to the obligations of the recipients of any confidential information.
Note that other types of intellectual property are protected by specific statutes, most notably the Patent Act (which covers new and useful inventions), the Trademarks Act (which covers “signs” used to distinguish a trader’s goods and/or services from those of others) and the Copyright Act (which covers the right to produce and reproduce a “work”, such as a literary work [which can include an Operations Manual], or an artistic work [which can include a logo], etc.).
4.3 Is copyright (in the Operations Manual or in proprietary software developed by the franchisor and licensed to the franchisee under the franchise agreement) protected by local law?
Copyright is governed by the federal Copyright Act and protects original works. Copyright arises upon creation of the work in issue; it is not necessary to register copyright in the work. Under Canadian law, the first owner of copyright in a work will usually be the author(s) of that work. For example, the individual(s) who write an Operations Manual or who develop software are deemed to be the first owner(s) of copyright in the Operations Manual or the software. This is the case even if those individuals were specifically hired for that task, unless they are employees of the franchisor, they created the works in the course of their employment, and their employment agreements explicitly state that ownership of copyright in any such works will belong to the franchisor. If independent contractors are hired to create manuals, software or other works for use in the franchise, it is essential to obtain a written agreement assigning ownership of the copyright to the franchisor.
Copyright can be registered, although registration is not mandatory. Registration is typically recommended if the copyright owner wishes to commence proceedings for copyright infringement.
5. Liability
5.1 What remedies can be enforced against a franchisor for failing to comply with mandatory disclosure obligations? Is a franchisee entitled to rescind the franchise agreement and/or claim damages?
In the Disclosure Provinces, franchisees are entitled to two statutory remedies against the franchisor for failure to comply with the franchisor’s mandatory disclosure obligations.
The first remedy is the statutory right of rescission, by which the parties are relieved of their contractual obligations under the franchise agreement and the franchisor must reimburse the franchisee for the franchisee’s expenses incurred in connection with the franchise. More particularly, the franchisor must: (a) refund to the franchisee any money received from the franchisee (other than money for inventory, supplies or equipment); (b) purchase from the franchisee any inventory, supplies and equipment that the franchisee had purchased pursuant to the franchise agreement; and (c) compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise, less the amounts set out in (a) and (b). A franchisee seeking to assert its statutory right of rescission must do so within 60 days from receipt of the DD in the case of minor deficiencies in the DD or SMC; however, if the franchisor failed to deliver a DD altogether, or if the DD provided was egregiously defective, then a franchisee is entitled to assert its rescission right up to two years from entering into the franchise agreement.
The second remedy is a statutory right to damages for misrepresentation. Generally, such damages will be available when the franchisee suffers a loss as a result of a misrepresentation contained in the DD or in an SMC, or as a result of a franchisor’s failure to comply with the franchisor’s disclosure obligations. Notably, the Franchise Legislation in the Disclosure Provinces permits the franchisee to sue for misrepresentation not only the franchisor but also persons closely related to the franchisor, such as any person who signed the DD or SMC. Also notable is that franchisees in the Disclosure Provinces are deemed by statute to have relied on any misrepresentation contained in the DD or SMC.
In the Disclosure Provinces, these statutory remedies are available to franchisees in addition to whatever remedies they may be entitled to under the common law or equity. In provinces and territories other than the Disclosure Provinces, the franchisee’s remedies are limited to those arising under common law or equity.
5.2 In the case of sub-franchising, how is liability for disclosure non-compliance or for pre-contractual misrepresentation allocated between franchisor and master franchisee? If the franchisor takes an indemnity from the master franchisee in the Master Franchise Agreement, are there any limitations on such an indemnity being enforceable against the master franchisee?
In the traditional master franchise arrangement, the master franchisee: (i) assumes the sole responsibility to provide its sub-franchisees with the required statutory disclosure; and (ii) indemnifies the franchisor against claims by the sub-franchisees concerning the franchise, including claims for rescission and misrepresentation.
While the parties are generally free to allocate risk in this way, their agreement will not displace any obligations that may be imposed on the franchisor by the Franchise Legislation. That means that the franchisor may potentially remain liable both to the sub-franchisees and to the master franchisee notwithstanding the contractual arrangements existing between the franchisor and the master franchisee.
Vis-à-vis the sub-franchisees, for instance, if the franchisor maintains significant operational control over the master franchisee and is involved in any way in the grant of the franchise to the sub-franchisee, the franchisor may be liable to claims for rescission or misrepresentation asserted by the sub-franchisee. Similarly, if the franchisor acts as the master franchisee’s agent with respect to the sub-franchisee, the franchisor may be liable for a misrepresentation claim by the sub-franchisee.
Vis-à-vis the master franchisee, any indemnity granted by that master franchisee in favour of the franchisor will generally be enforceable but only to the extent that indemnity does not waive or release from (i) any right given to the master franchisee under any operative franchise legislation, or (ii) any obligation or requirement imposed on a franchisor or franchisor’s associate under any such legislation.
5.3 Can a franchisor successfully avoid liability for pre-contractual misrepresentation by including a disclaimer in the franchise agreement?
Yes, but only in a limited fashion. In Ontario, at least, it is clear that a franchisor can successfully avoid liability for pre-contractual misrepresentation (provided those representations clearly relate to the subject matter of the franchise agreement, and provided those misrepresentations were not fraudulently made) by including a disclaimer in the franchise agreement, but only to the extent such misrepresentations were not contained in the DD. The franchisor will remain liable for misrepresentations contained in the DD (and for damages resulting from the franchisor’s failure to comply with its disclosure obligations) notwithstanding the inclusion of any disclaimer in the franchise agreement.
5.4 Does local law permit class actions to be brought by a number of aggrieved franchisees and, if so, are class action waiver clauses enforceable?
Yes, aggrieved franchisees are permitted to sue collectively, pursuant to class proceedings legislation in each of the Disclosure Provinces.
The extent to which that right may be modified through the use of class action waivers in franchise agreements remains unsettled: (i) recent court decisions have called into question whether class action waivers are enforceable in light of public policy concerns; and (ii) a mandatory arbitration clause in the franchise agreement may have the effect of prohibiting franchisees from asserting their claims collectively by means of a class action.
6. Governing Law
6.1 Is there a requirement for franchise documents to be governed by local law? If not, is there any generally accepted norm relating to choice of governing law, if it is not local law?
The franchise statutes in each of the Disclosure Provinces mandate that local law apply to the subject franchise agreement, but only with respect to claims to which the legislation applies. Theoretically, claims that would not be the subject of a statutory right or obligation, such as claims based on common law misrepresentation, could be governed by non-local law.
The parties to a franchise agreement concerning a franchise that is outside of the Disclosure Provinces are free to choose any governing law.
6.2 Do the local courts provide a remedy, or will they enforce orders granted by other countries’ courts, for interlocutory relief (injunction) against a franchisee to prevent damage to the brand or misuse of business-critical confidential information?
Canadian courts will recognise and enforce monetary orders granted by foreign courts when the foreign order is final, where the court that issued it had the jurisdiction to do so, and where the judgment was not obtained in breach of natural justice or public policy, etc.
The degree to which Canada courts will recognise and enforce foreign non-monetary awards is unsettled.
6.3 Is arbitration recognised as a viable means of dispute resolution and is your country a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards? Do businesses that accept arbitration as a form of dispute resolution procedure generally favour any particular set of arbitral rules?
Canadian courts strongly support the use of arbitration as a means of dispute resolution where the parties have agreed to arbitrate.
Canada is a party to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
No particular set of arbitral rules predominates over others in franchise agreements that include arbitration provisions. It is not uncommon for the parties to select the arbitration rules published by private institutions, such as the ADR Institute of Canada.
7. Real Estate
7.1 Generally speaking, is there a typical length of term for a commercial property lease?
Ten years is typical and very common for the initial term of a commercial lease. However, the renewal terms, if available, will often be for five years each. The franchisor and franchisee will often attempt to ensure that the timeline of the lease and the franchise agreement are co-terminus.
7.2 Is the concept of an option/conditional lease assignment over the lease (under which a franchisor has the right to step into the franchisee/tenant’s shoes under the lease, or direct that a third party (often a replacement franchisee) may do so upon the failure of the original tenant or the termination of the franchise agreement) understood and enforceable?
If properly drafted, it will be enforceable. The landlord, franchisor, and franchisee must each agree to such an arrangement. Merely having the franchisee agree to such options in the franchise agreement will not suffice, as that is a contract between the franchisor and franchisee, but not usually the landlord. Such options affect the lease and, to be enforceable, they must be accepted by all parties to the lease, including the landlord.
It is common for the franchisor to require that the franchisee, when securing a lease, also secure the landlord’s consent to the above options. These options are usually found in an addendum to lease or three-party agreement, which is signed by the franchisor, franchisee, and landlord.
7.3 Are there any restrictions on non-national entities holding any interest in real estate, or being able to sub-lease property?
Generally no, although there may be additional taxes imposed depending on the type and location of the property.
7.4 Give a general overview of the commercial real estate market. To what extent has the real estate market been affected by the Coronavirus pandemic? Specifically, can a tenant expect to secure an initial rent free period when entering into a new lease (and if so, for how long, generally), or are landlords demanding “key money” (a premium for a lease in a flagship location)?
Currently, rent-free periods that encompass the time necessary to construct the business premises are somewhat common, and these can sometimes be followed by a period where no base rent is owed (but additional rent is still owed, such as the tenant’s proportionate share of building expenses). The no-base-rent period can be for one or more months, depending on local market conditions and bargaining power.
While key money is a possibility, it is a rare occurrence. If a location is particularly valuable, that value is more likely to be reflected in the base rent amount, and possibly higher and more numerous ongoing fees in the form of additional rent.
Some opportunities for negotiation arose during periods of government-mandated lockdowns, such as rent abatement for brief periods, but landlords have not changed their overall approach to commercial leasing, including the terms of leases and their willingness to bargain.
8. Online Trading
8.1 If an online order for products or request for services is received from a potential customer located outside the franchisee’s exclusive territory, can the franchise agreement impose a binding requirement for the request to be re-directed to the franchisee for the territory from which the sales request originated?
Yes, under the franchise agreement a franchisor can require a franchisee to re-direct an online order/request to the appropriate franchisee holding exclusive territory rights related to that order/request. It is prudent for the franchise agreement to be specific about such online activities, particularly the process for resolving any potential disagreement between franchisees or infringement of territorial rights.
8.2 Are there any limitations on a franchisor being able to require a former franchisee to assign local domain names to the franchisor on the termination or expiry of the franchise agreement?
No, a franchisor can require a former franchisee to assign local domain names to the franchisor upon termination or expiry of the franchise agreement. There should be, and usually is, a clear provision in the agreement that communicates this requirement.
9. Termination
9.1 Are there any mandatory local laws that might override the termination rights one might typically expect to see in a franchise agreement?
The parties’ freedom to negotiate their rights and obligations concerning the termination of a franchise agreement will be constrained in two ways: (i) the parties must conduct themselves in accordance with the duty of good faith they owe one another both under statute and at common law, which generally means that the termination provisions must be performed and enforced honestly and in a commercially reasonable manner; and (ii) in the Disclosure Provinces, the termination provisions cannot have the effect of waiving or releasing by a franchisee of a right given under the relevant franchise statute or of an obligation or requirement imposed on a franchisor under the statute.
9.2 Are there local rules that impose a minimum notice period that must be given to bring a business relationship that has existed for a number of years to an end, which will apply irrespective of the length of the notice period set out in the franchise agreement?
Canadian courts will not generally interfere with any express notice period contained in a franchise agreement. In the unusual case where a franchise agreement does not provide for a notice period with respect to termination, the court may imply a minimum notice period by reference to industry custom.
10. Joint Employer Risk and Vicarious Liability
10.1 Is there a risk that a franchisor may be regarded as a joint employer with the franchisee in respect of the franchisee’s employees? If so, can anything be done to mitigate this risk?
Yes, there is some risk that a franchisor may be regarded as a joint employer with the franchisee with respect to the franchisee’s employees.
That risk can be mitigated by expressly allocating to the franchisee sole responsibility and discretion in connection with employment matters; the more discretion the franchisor reserves for itself concerning the approval of the franchisee’s employees, their scheduling, and their training, the greater the franchisor’s liability to be deemed a joint employer.
The franchisor can also mitigate the risk somewhat by including in the franchise agreement express provisions stipulating that the franchisor and franchisee are independent contractors and not in an employment or agency relationship; while the presence of such provisions will not, on its own, be determinative of how a court or tribunal may characterise the legal relationship between the parties, the provisions will be taken into account.
An indemnity by the franchisee in favour of the franchisor in connection with claims by the franchisee’s employees will also serve to mitigate the franchisor’s risk.
10.2 Is there a risk that a franchisor may be held to be vicariously liable for the acts or omissions of a franchisee’s employees in the performance of the franchisee’s franchised business? If so, can anything be done to mitigate this risk?
Yes, there is some risk that a franchisor may be held vicariously liable for the acts or omissions of a franchisee’s employees. The magnitude of that risk will be a function of the degree to which the franchisor controls the franchisee or the franchisee’s employees in connection with the act or omission in dispute.
The franchisor can mitigate that risk by: (i) expressly allocating to the franchisee sole responsibility and discretion in connection with employment matters; (ii) including in the franchise agreement provisions stipulating that the franchisor and franchisee are independent contractors and not in employment or agency provision; (iii) obtaining an indemnity from the franchisee in favour of the franchisor in connection with claims by the franchisee’s employees; and (iv) requiring the franchisee prominently to post signage proclaiming to the public the franchisee’s status as an independent contractor.
11. Currency Controls and Taxation
11.1 Are there any restrictions (for example exchange control restrictions) on the payment of royalties to an overseas franchisor?
There are no exchange control restrictions in Canada, and it is unlikely a franchisor will be based in a country that imposes exchange control restrictions (so-called “transitional economies”). Generally, there are no special restrictions on the payment of royalties to overseas entities, although there are many tax rules surrounding payments to and from “non-resident persons”, which should be discussed with appropriate professional advisors.
11.2 Are there any mandatory withholding tax requirements applicable to the payment of royalties under a trade mark licence or in respect of the transfer of technology? Can any withholding tax be avoided by structuring payments due from the franchisee to the franchisor as a management services fee rather than a royalty for the use of a trade mark or technology?
Royalty payments to non-Canadian franchisors or their non-
Canadian affiliates are subject to a 25% withholding tax; however, for example, payments to US franchisors or their US affiliates are subject to the US-Canada Tax Treaty, which tax convention reduces this withholding tax to 10%. In the US, franchisors may also seek a foreign tax credit from the Internal Revenue Service to recover the amount of this cost.More generally, any payment from a Canadian franchisee to a non-Canadian franchisor will be subject to a 25% withholding tax if it falls within the category of a “rent”, meaning payment made to the owner of property (the franchisor) for the right to use that property for a given period of time. This can include payments for the use of trademarks, technology, and even franchise renewal fees (but not the initial franchise fee). Such requirements will not change if the payment is in a lump sum versus regular payments based on a percentage or set amount.
If a payment can be characterised as a royalty or a rent, describing such payment as a management or service fee for the purpose of avoiding the above tax is not likely to succeed. It is worth noting that the initial franchise fee has been considered by Canadian courts to be a legitimate example of a service fee, and therefore not subject to the above tax; the prospective franchisee is paying the franchisor to assess the prospect and conduct the needed administrative and legal work.
11.3 Are there any requirements for financial transactions, including the payment of franchise fees or royalties, to be conducted in local currency?
No. A franchisor can, in theory, insist it be paid in a foreign currency, such as by making payments to a USD account it maintains at a Canadian or foreign bank. The currency to be used should be specified in the franchise agreement and the DD, plus any exceptions (such as only the franchise fee being payable in USD).
12. Commercial Agency
12.1 Is there a risk that a franchisee might be treated as the franchisor’s commercial agent? If so, is there anything that can be done to help mitigate this risk?
There is a risk that a franchisee may be seen as a franchisor’s agent if: (a) the franchise agreement does not make the nature of their legal relationship clear; and/or (b) their conduct suggests to the public that the franchisee is an authorised representative or agent of the franchisor. To mitigate this risk, the franchise agreement, and their business conduct, should clearly demonstrate that they are independent contractors and not agents of one another. Canada does not have commercial agency legislation that applies to the franchise relationship.
13. Good Faith and Fair Dealings
13.1 Is there any overriding requirement for a franchisor to deal with a franchisee in good faith and to act fairly in its dealings with franchisees according to some objective test of fairness and reasonableness?
Yes, both the franchisor and the franchisee owe one another a duty of good faith in the performance and enforcement of the franchise agreement. That duty is imposed on the parties by statute (in the case of those franchise agreements that operate within one of the Disclosure Provinces) and at common law.
The duty of good faith requires the parties to: (a) perform and enforce the contract honestly and in a commercially reasonable manner; and (b) have regard for one another’s commercial interests.
The duty of good faith is not a fiduciary duty, and neither party is obligated to prefer the other party’s interests over its own. The duty of good faith does not extend so far as to permit the court to replace or amend express contractual provisions.
13.2 Is there any limitation on a good faith obligation being unenforceable if it only applies from franchisee to franchisor, rather than being mutual?
In Canada, the duty of good faith is reciprocally imposed on both franchisors and franchisees; the franchisor accordingly has no freedom to impose the duty unilaterally on the franchisee.
14. Ongoing Relationship Issues
14.1 Are there any specific laws regulating the relationship between franchisor and franchisee once the franchise agreement has been entered into?
The legislation referenced in question 1.2 places a duty of fair dealing on both the franchisor and the franchisee in the performance and enforcement of their agreements. This duty of fair dealing includes a duty to act in good faith and in accordance with reasonable commercial standards. For further information, please see section 13 above.
15. Franchise Renewal
15.1 What disclosure obligations apply in relation to a renewal of an existing franchise at the end of the franchise agreement term?
Disclosure is required unless the renewal is for the renewal of a franchise agreement where there has been no interruption in the operation of the business operated by the franchisee under the franchise agreement and there has been no material change since the franchise agreement or latest renewal or extension of the franchise agreement was entered into. In Alberta, disclosure is not required for a renewal or extension of an existing franchise agreement.
It may be unwise for a franchisor to rely on this exemption given that what is deemed a material fact includes any information about the business 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. This definition casts a wide net and a franchisor would be exposing itself to potential liability should it decide to take advantage of the exemption where it should not have.
15.2 Is there any overriding right for a franchisee to be automatically entitled to a renewal or extension of the franchise agreement at the end of the initial term irrespective of the wishes of the franchisor not to renew or extend?
No; however, if the franchisee has complied with all of the conditions necessary for renewal in the franchise agreement and has not breached the terms of the franchise agreement, failure by the franchisor to grant the renewal or extension may be a breach of the franchisor’s duty of fair dealing.
15.3 Is a franchisee that is refused a renewal or extension of its franchise agreement entitled to any compensation or damages as a result of the non-renewal or refusal to extend?
If a franchisee is entitled to a renewal based on the terms of the franchise agreement and the franchisor declines, the franchisee may have cause to commence an action against the franchisor for contractual breach and/or breach of the franchisor’s duty of fair dealing.
16. Franchise Migration
16.1 Is a franchisor entitled to impose restrictions on a franchisee’s freedom to sell, transfer, assign or otherwise dispose of the franchised business?
Yes, a franchisor is entitled to impose restrictions on a franchisee’s freedom to sell, transfer, assign or otherwise dispose of the franchised business. Commonly, the franchisor will reserve for itself the right to approve any assignee or transferee and may as well reserve for itself a right of first refusal.
16.2 If a franchisee is in breach and the franchise agreement is terminated by the franchisor, will a “step-in” right in the franchise agreement (whereby the franchisor may take over the ownership and management of the franchised business) be recognised by local law, and are there any registration requirements or other formalities that must be complied with to ensure that such a right will be enforceable?
Yes, Canadian courts will generally enforce “step-in” rights; such step-in rights need not be registered. The franchisor’s operation of the franchised business will be subject to its overarching statutory and common law duty of good faith.
16.3 If the franchise agreement contains a power of attorney in favour of the franchisor under which it may complete all necessary formalities required to complete a franchise migration under pre-emption or “step-in” rights, will such a power of attorney be recognised by the courts in the jurisdiction and be treated as valid? Are there any registration or other formalities that must be complied with to ensure that such a power of attorney will be valid and effective?
Yes, Canadian courts will recognise any power of attorney granted by the franchisee in favour of the franchisor to facilitate the franchisor’s “step-in” rights. Such powers of attorney need not be registered; however, to be enforceable, they must be drafted in a manner that complies with legal requirements, such as their execution in the presence of two witnesses.
17. Electronic Signatures and Document Retention
17.1 Are there any specific requirements for applying an electronic signature to a franchise agreement (rather than physically signing a “wet ink” version of the agreement), and are electronic signatures recognised as a valid way of creating a binding and enforceable agreement?
Electronic signatures can be used to execute franchise agreements, and other agreements that are appended to franchise agreements, as long as certain statutory requirements are met. That said, some documents must use wet ink signatures, including wills, promissory notes, certain powers of attorney, specific real estate documents and others. To address practical challenges created by the global pandemic, some rules may have been temporarily relaxed. It is prudent to seek legal advice for documents requiring signatures.
Canada’s Personal Information Protection and Electronic Documents Act (“PIPEDA”) requires that an electronic signature:
- Be unique and distinctive to the person using it.
- Be created under the signer’s sole control.
- Be created by technology that can confirm the identity of the signer.
- Be protected by technology that can detect any subsequent changes to the e-signature.
Most provinces have legislation based on the Uniform Electronic Commerce Act (“UECA”), except Quebec, which has the Act to Establish a Legal Framework for Information Technology. Requirements under these statues are very similar to those under PIPEDA.
17.2 If a signed/executed franchise agreement is stored electronically (either having been signed using e-signatures or a “wet ink” version having been scanned and saved as an electronic file), can the paper version of the agreement be destroyed?
It is always advisable to securely file all executed hard copies of legal documents, including a franchise agreement and its appendices. That said, electronic copies of duly executed agreements that meet e-signature requirements are legally valid and enforceable. Corporate document retention policies should be implemented for compliance and other practical reasons.
18. Current Developments
18.1 What is the biggest challenge franchising is facing in your jurisdiction and how are franchisors responding to that challenge?
Franchisors in Canada are concerned about the state of the North American economy, as talk of a recession persist, and interest rates continue to rise in an effort to control inflation. Adding to this significant issue is a continuing labour shortage, as well as supply-chain disruptions, which, while lessening, appear to be persisting, in some respects, following the COVID-19 pandemic.
Franchisors and franchisees are having some difficulty filling vacant positions. Not all franchise systems have fully recovered from the effects of the COVID-19 pandemic on their industries.
The supply chain disruptions that emerged soon after the pandemic developed appear to be decreasing, although clear challenges remain. The enduring impact consists of inordinate delays in, and increased costs of, acquiring goods such as inventory and construction material.
It is rather difficult to mitigate these challenges when attemp-
ting to respond to inflationary pressures, personnel vacancies, and supply chain disruptions. Some Canadian franchisors continue to be cautious in their spending and in incurring additional debt, and they are looking for ways to streamline their operations; others have looked to increase their pricing, both at the franchisee and customer levels.
Acknowledgments
The authors would like to thank Stefan Ayache for his contributions to this chapter.
Stefan Ayache graduated from the faculty of law at the University of Windsor, where he has consistently performed in the top 5% of his class, and obtained his J.D. Stefan is an articling student at Hoffer Adler LLP, where he assists in matters of franchise law, commercial law, commercial litigation, and intellectual property. Prior to attending law school, Stefan earned a Bachelor of Commerce, specialising in finance from York University, and spent four years working in the financial services industry.
Production Editor's Note
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