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Preparing Disclosure Documents for Renewal

Author(s): Christine Jackson

October 2014

A franchisor wanting to grant a franchise in any of the regulated provinces must provide a franchise disclosure document to a prospective franchisee not less than 14 days before the earlier of the signing by the prospective franchisee of the franchise agreement or any agreement relating to the franchise and the payment of any consideration relating to the franchise. With the continuing trend in the case law calling for customization of disclosure, it is now a foregone conclusion that the courts, in regulated provinces, are not prepared to accept a one-size-fits-all approach to franchise disclosure. A bespoke approach must be employed and the disclosure document must be prepared for, and relevant to, the specific franchise to which it relates and must be current to the date that it is delivered.

The move away from a one-size-fits-all approach to disclosure means, in many circumstances, a standard disclosure document prepared for a new franchise offering must be modified or tailored in the context of a renewal. In particular, in preparing a disclosure document where the various provincial exemptions relating to the delivery of a disclosure document on a renewal do not apply, a franchisor must ensure that the contents of the document are relevant to the particular franchise being renewed. A franchisor must also ensure that any inaccurate, irrelevant or inappropriate information relating to new franchises is deleted or amended for the renewal franchise.

To facilitate customized disclosure, franchisors may want to consider revising their standard disclosure document to build in a certain amount of flexibility through the use of notes to renewing franchisees, which set out information in the body of the disclosure document, and schedules specific to renewing franchisees. Having said that, the move towards bespoke disclosure means more than just revising the standard disclosure document to make it generally applicable to renewal franchises. This is because each renewal requires careful consideration of any unique facts that must be reflected in the disclosure document.

For example, the following is a non-exhaustive list of the types of information in the standard disclosure document that may need to be customized in the context of a renewal franchise:

  • The specific location of the franchise, protected territory and any lease-related documents will almost always be known at the time of disclosure.
  • If certain renewal financial terms were previously agreed to, these terms should replace the initial franchise deposits and franchise fees set out in the standard disclosure document.
  • The list of costs associated with the establishment of a new franchise will be different since a renewal franchisee will not bear the same start-up costs as part of continuing the operation of the franchise as will a new franchisee.
  • If the renewal franchisee is required to renovate the franchise as a condition of renewal, the costs associated with such renewal will need to be included in the disclosure document.
  • If an estimate or annual operating costs or earnings projection is provided, those figures applicable to a renewal franchise will likely differ from those of a new franchise since they will generally be known from historical information.
  • The terms and conditions of financing arrangements may differ for a renewal franchise.
  • The description of training or other assistance offered to a renewal franchisee will almost always be different than the training or other assistance provided to a new franchisee.
  • The restrictions or conditions relating to termination, renewal or transfer may be different in respect of a particular renewal franchise as opposed to a new franchise.

There may be additional material facts specific to the renewal franchise that may need to be included in the disclosure document. Franchisors should ensure that the disclosure documents provided on renewals are specifically tailored to the particular franchises in question. For this to occur efficiently, franchisors should ensure that their standard disclosure document is structured in a way that contemplates renewals and that their disclosure team is educated about what types of customized information must be included in the disclosure document.

Part of the October 2014 - Franchise Review