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Franchise disclosure obligations during a pandemic

Author(s): Andraya Frith, Dominic Mochrie, Lucas Versteegh

Mar 30, 2020

For further information on the changes below or other franchise matters, please contact one of the authors above or any member of our Franchise or Franchise Litigation Groups.

It has become increasingly evident that the unprecedented commercial and personal disruption caused by the COVID-19 pandemic will last for several more weeks, if not months.

Franchisors are understandably focused on responding to the immediate and frontline needs of their franchisees, employees and customers, but as the pandemic timeline stretches, many franchisors will find themselves confronted with disclosure obligations to renewing, resale or even new franchisees. This is especially important for any franchisees (new or prospective) who have already received a franchise disclosure document (“FDD”) but who have not yet signed a franchise agreement. In such cases, a statement of material change (“SMC”) may need to be provided to account for the impact of the economic and health crisis on the franchise system.

To what extent should the COVID-19 crisis be addressed in the FDD or any SMC?

In the short to medium term, the pandemic is likely to have a significant and multifaceted impact on many (if not most) franchise systems and, therefore, on the accuracy and completeness of certain information contained in a franchisor’s existing template FDD. In addition to including a general description of the impact of COVID-19 on the franchise system, the “best practices” approach for franchisors would be to update any of the mandated disclosure items that have been affected.  For example, existing disclosure related to training, costs of establishing the franchise, financing programs and build-out timelines may need revising. To the extent the franchisor is providing royalty or other relief to franchisees, these temporary measures should also be disclosed.  Any other “material facts” (i.e., information about the franchisor or the franchise system that would “reasonably be expected to have a significant effect” on the value or price of the franchise or on the franchisee’s decision to acquire the franchise) also need to be disclosed. This general obligation to disclose all other “material facts” requires special consideration in the context of the COVID-19 pandemic.

How can a franchisor create a compliant FDD in such an unpredictable environment?

While the franchise disclosure obligation does not require the franchisor to predict the ultimate extent and scope of the pandemic’s influence on the franchise system, franchisors should strive to include potential impacts of COVID-19 that are reasonably foreseeable at the time of disclosure. Franchisors should also consider whether any existing disclosure information or statements are no longer accurate and may be misleading to franchisee candidates.

Furthermore, as the COVID-19 pandemic — and the new business environment it has created — is evolving at an alarming pace, franchisors will need to implement an internal process to revisit their disclosure document on a more regular basis in order to ensure that the FDD is updated promptly to reflect any known developments and impacts on the franchise system.

Osler has developed an efficient approach to assessing and updating your template FDDs and SMCs to address the impact of COVID-19 on your franchise system — and to keep your disclosure documents updated in the weeks and months to come. Please let us know if you would like our support to update your FDD, and we will send you our COVID-19 disclosure questionnaire to start the process.