Can a franchisor terminate instead of approving the sale of a struggling franchise?

A franchisee who wants out of a struggling location may fear that asking to sell invites a termination notice. The answer is found in your agreement’s termination and default terms, read alongside the fair dealing duty that applies in provinces with franchise statutes.

Termination rights come from the contract

Start with the grounds for termination your agreement provides, such as an uncured default, and ask a lawyer what else the general law may allow. Alberta’s disclosure regulation requires a franchisor’s disclosure document to say whether the agreement has provisions on renewal, termination and transfer, and where they are. Use that pointer, or the agreement’s table of contents, to find all three clauses at once.

Read the default and cure terms

• Which events count as defaults, and which are curable.
• How much notice the franchisor must give, and the length of any cure period.
• Whether poor sales alone can amount to a default, or only unpaid fees and breached standards.
• Whether a pending sale affects the franchisor’s right to terminate.

Fair dealing applies to enforcement

Ontario’s Arthur Wishart Act (s.3) and Alberta’s Franchises Act (s.7) say every franchise agreement imposes a duty of fair dealing in its performance and enforcement. British Columbia’s Act (s.3(1)) extends the duty to the exercise of a right under the agreement. A franchisor that terminates must therefore act in good faith and in line with reasonable commercial standards, in the wording of the Ontario and British Columbia Acts. Ontario’s Act (s.9) also keeps any other right or remedy you have at law.

Protect your position while you sell

Keep fees and reports current so you do not hand the franchisor a default. Ask in writing whether the franchisor will approve a sale and on what conditions. Do not stop paying or operating without legal advice, and check whether doing so would itself be a default under your agreement.