Who does it apply to?
The Act applies to new franchise agreements, existing franchise agreements that are renewed or extended on or after February 1, 2017 and franchise agreements entered into before February 1, 2017.
What’s in the Act?
1. Franchise disclosure document (“FDD”)
The franchisor must provide the franchisee with a Franchise Disclosure Document in prescribed form at least 14 days prior to the earlier of execution of a franchise agreement and the payment of any fees relating to the franchise.
If there are any material changes to the franchise system during aforementioned 14 day period, the franchisor must also deliver a statement of material change (“SMC”) to a prospective franchisee.
The FDD requires extensive disclosure of information, including information regarding franchise fees, estimated initial investments, franchisee’s obligations, franchisor’s assistance, advertising and training, restrictions on sources of products and services, trademarks, patents, financial performance representations, financial statements, termination provisions and more. To ensure you are adequately addressing the FDD requirements, be sure to consult a lawyer who has expertise in this area.
2. Duty of Fair Dealing
The Act imposes a duty of fair dealing on franchisors and franchisees which requires that the parties act in good faith and in accordance with reasonable commercial standards. This applies to the performance and enforcement of a franchise agreement and any exercise of a right thereunder.
A franchisor may require a prospective franchisee to provide a refundable deposit of up to 20% of the initial franchise fee, a confidentiality agreement and an agreement pertaining to the location of the prospective franchise prior to supplying the franchisee with an FDD.
4. Right of rescission
A franchisee may rescind a franchise agreement within 60 days after receiving a FDD if:
- the franchisor failed to provide an FDD or SMC, if applicable, within the required time; or
- the FDD or SMC, if applicable, did not meet the Act’s requirements.
If the franchisor fails to provide the franchisee with an FDD, the franchisee has two years to rescind the agreement without a penalty.
If a franchisee suffers a loss due to a misrepresentation made in an FDD or SMC or such documents not comply with the Act, the franchisee has a right of action for damages against the franchisor and anyone else who signed the documents.
Be sure you’re covered
This article highlights some of the law under the Act and there are many parts of the Act that have not been covered. If you are not familiar with the new requirements of the Act, are considering franchising your business or purchasing a franchise, or need to renew an existing franchise agreement, please contact Sunny Aujla for further information.