Can I sell my franchise while I’m in default?

Being in default does not, on the face of Ontario’s franchise statute, stop a sale. The Arthur Wishart Act (Franchise Disclosure), 2000 does not use the word “default” at all. What binds you is the contract you signed with the franchisor. Whether you can sell, and on what terms, comes from the clauses on default, cure periods and transfer, read together rather than one at a time.

Read the default and transfer clauses together

Start with what the default actually is: a missed royalty payment, a failed inspection, a late renewal of a lease. Then look at whether the agreement gives you a way to cure it and whether a notice has been served. Next, find the transfer clause and ask whether it makes the franchisor’s approval depend on the franchisee being in good standing. Those answers shape what you can promise a buyer.

What fair dealing adds

Under section 3 of the Ontario Act, every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement, and that duty includes acting in good faith and in accordance with reasonable commercial standards. A party that breaches it can be sued for damages. British Columbia’s Franchises Act words its duty to cover the exercise of a right under the agreement. Other provinces have their own statutes, and the Canadian Franchise Association notes important differences between jurisdictions, so ask a lawyer which one applies to your business.

Where the franchisor’s approval right fits

The Ontario Act refers to a franchisor’s right, exercisable on reasonable grounds, to approve or disapprove a grant. It does so in section 5(8), only to say that such a right does not by itself mean a franchisee’s resale is effected by or through the franchisor, which matters for whether that resale is exempt from the franchisor’s disclosure duty. It does not list which grounds are reasonable, and it does not say that an uncured default is one. Ask a franchise lawyer how a court would read your agreement’s wording.

Raising it with a buyer and the franchisor

Ask a franchise lawyer what you must tell a buyer about the default. Consider asking the franchisor in writing what it needs to see cured before it will approve a transfer, and whether a sale that clears the default would satisfy it. Keep the response in case a dispute follows.