RENEWAL OF FRANCHISE AGREEMENT

Every business contract in a franchise system has legal consequences that need to be identified and addressed head on, starting with disclosure documents and franchise agreements.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The process for renewing a franchise agreement is determined by the terms of the existing franchise agreement, together with applicable provincial franchise legislation (i.e., a number of Canadian provinces, including Ontario, Alberta, British Columbia, Manitoba, New Brunswick, and Prince Edward Island, have specific franchise laws, which impose a duty of "fair dealing" on both the franchisor and franchisee and generally require the franchisor to provide new franchise disclosure documents upon renewal, with some exceptions).

A. The Franchise Agreement

The original franchise agreement is the primary document that outlines the conditions for renewal. It's crucial to review this agreement to understand:

• Renewal Conditions: The agreement will specify the conditions the franchisee must meet to be eligible for renewal. These often include being in compliance with the terms of the current agreement, such as no unpaid royalties or other defaults.

• Notice Period: The franchisee is typically required to provide written notice of their intention to renew within a specific timeframe (e.g., six months to one year before the agreement's expiration).

• Renewal Fees: The agreement may specify a non-refundable renewal fee that the franchisee must pay.

• New Terms: The renewal clause will often state that the renewed agreement will be based on the franchisor's "then-current" franchise agreement. This is a critical point, as the new agreement may contain terms and conditions that are significantly different from the original, including changes to royalty payments, advertising contributions, and other operational requirements.

B. The Franchise Disclosure Document

In provinces that legislatively mandate disclosure, a franchisor is generally required to provide a new franchise disclosure documents to the franchisee at least 14 days before the new agreement is signed or before any payment is made. The new franchise disclosure documents for a renewal must include:

• Material Changes: It must disclose any "material changes" that have occurred in the franchise system since the last agreement was signed. A material change is any information 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 renew.

• New Agreement: A copy of the new, "then-current" franchise agreement that the franchisee will be required to sign.

• Financial Statements: Updated financial statements for the franchisor.

• Other Required Information: All other prescribed information, such as litigation history and lists of current and former franchisees.

C. Exemptions to Disclosure

While disclosure is generally required for renewals, some provinces offer exemptions. The most common exemption, used in all disclosure provinces except Alberta, applies if:

• There has been no interruption in the franchisee's business operations since the last agreement.

• There have been no "material changes" to the franchise system since the last agreement was signed.

Alberta's exemption is less complicated and simply states that a disclosure document is not required for a renewal or extension of an existing franchise agreement. Given the broad definition of "material change" in most provincial Acts, it's often a best practice for franchisors to provide an updated franchise disclosure documents with each renewal to avoid the risk of a legal challenge.

D. Franchisor's Right to Refuse Renewal

A franchisor can generally refuse to renew a franchise agreement if the franchisee has not met the conditions specified in the original agreement. However, the franchisor's ability to refuse a renewal is subject to the provincial duty of "good faith and fair dealing." This means the franchisor cannot act arbitrarily or for improper motives. Courts will examine the commercial reasonableness of a franchisor's decision to deny a renewal.

E. Legal and Financial Advice

Given the complexities and potential for significant changes in terms, it is highly recommended that a franchisee seeking to renew their agreement, it is strongly advise that you consult with both a franchise lawyer (i.e., to review the new franchise disclosure documents and franchise agreement) and an accountant or financial advisor (i.e., to assess the financial implications of any new fees or changes in the royalty structure). This is particularly significant, given that the information provided on this website is generic and for general informational purposes only and does not constitute legal advice. Franchise law is complex and varies by province. You should consult with a qualified professionals to discuss your specific situation.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

The Franchise Disclosure Document. A Franchise Disclosure Document is a detailed document that a franchisor provides the franchisee during the initial stages of purchasing a franchise. It is designed to provide franchisees with vital information that they need in order to make an informed decision prior to investing in a franchise opportunity. Read more.

 

The Franchise Agreement. A Franchise Agreement is a comprehensive and legally binding contract that establishes the terms of the relationship between a franchisor and a franchisee, establishing how the franchisee is to carry out its franchised business in conformity with the established franchise system. Read more.

 

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Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.