Are franchise resales exempt from the franchise disclosure requirements?

A resale is the sale of an existing franchise by its current franchisee, not the grant of a new franchise by the franchisor. Ontario’s Arthur Wishart Act lists situations where the franchisor’s duty to give a disclosure document does not apply, and a franchisee’s own resale is one of them, but only when every condition is met.

The conditions for the resale exemption

The Act exempts the grant of a franchise by a franchisee only if all of the following are true.

• The selling franchisee is not the franchisor, an associate of the franchisor, or a director, officer or employee of either.
• The sale is for the franchisee’s own account.
• If the franchise is a master franchise, the entire franchise is being sold.
• The sale is not effected by or through the franchisor.

Franchisor approval does not cost the exemption

The Act says a grant is not effected by or through the franchisor merely because the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove it, or because a transfer fee is payable. The fee must be an amount set out in the franchise agreement or one that does not exceed the franchisor’s reasonable actual costs of processing the grant. Ordinary transfer approval therefore does not by itself put a resale back under the disclosure duty.

Who has to prove the exemption

The Act places the burden of proving an exemption on the person claiming it, so a franchisor or seller who relies on the resale exemption has to show that each condition was met. Where the franchisor does more than approve and charge a fee, whether the sale was effected through it is a question to put to a lawyer. If the exemption fails, the Act’s rescission and damages provisions for missing disclosure come into play.

Outside Ontario

Alberta, British Columbia, Manitoba, New Brunswick and Prince Edward Island have their own franchise statutes, so an Ontario answer does not carry over, and each province’s text must be checked. Even where no statutory duty applies, a buyer can still ask for the current franchise agreement and the location’s financial records; see what to read before signing a transfer agreement.