Can a franchisor impose new capital requirements on a franchise buyer?

Start with the franchise agreement. Check whether it, or a manual it incorporates, lets the franchisor require a franchisee to spend on remodels, equipment or system upgrades. A buyer taking over an existing location should read the agreement they will actually be signing, including how it treats changes made after signing. In provinces with franchise statutes, those statutes add duties on top of the contract. The franchise agreement checklist covers the wider review.

What the agreement has to say

Look for clauses on required upgrades, remodels, technology changes and equipment replacement, and note whether each is tied to the term, to a renewal or to a transfer. Ask whether the franchisor can change the operations manual after signing and whether a change can carry a cost. Ask for a written list of any work already required at the location. A buyer of a resale should also ask the seller what maintenance or upgrades have been put off, because those may land on the new owner. See also whether a resale location has to be renovated.

What the statutes add

Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 says every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement, and that the duty includes acting in good faith and in accordance with reasonable commercial standards (s. 3). British Columbia’s Franchises Act has a similar duty that applies, in its words, "including in the exercise of a right under the franchise agreement" (s. 3). Alberta’s Franchises Act also imposes a duty of fair dealing (s. 7). The Canadian Franchise Association notes that several provinces have franchise disclosure legislation and that there are important differences between jurisdictions.

Disclosure before you sign

In Ontario, the disclosure document must contain all material facts and copies of all proposed franchise agreements (s. 5(4)). A material fact includes information about the business, operations, capital or control of the franchisor or the franchisor’s associate, or about the franchise system, that would reasonably be expected to have a significant effect on the value or price of the franchise or on the decision to acquire it. A franchisor must also give a written statement of any material change as soon as practicable after the change has occurred and before the earlier of signing or payment (s. 5(5)). Ask whether a planned system-wide spending requirement has been disclosed. A resale made by a franchisee may fall within an exemption in s. 5(7)(a), subject to its conditions, so a resale buyer may receive no disclosure document and should ask for the information anyway.