Do rescission rights apply when I buy a franchise resale?

Rescission is a remedy Ontario’s Arthur Wishart Act gives a franchisee who did not receive, on time or in full, the disclosure the Act requires. A resale can be exempt from that disclosure duty, so the answer for a resale buyer turns on the exemption first and the remedy second. This page covers Ontario’s statute only.

Where the right comes from

Section 6 lets a franchisee rescind the franchise agreement, without penalty or obligation, no later than 60 days after receiving the disclosure document, if the franchisor failed to provide the document or a statement of material change within the time section 5 requires, or if the contents fell short of section 5. A franchisee may also rescind no later than two years after entering the agreement if the franchisor never provided the document. Both grounds turn on the disclosure document that section 5 requires.

Why an exempt resale changes the answer

Section 5 says it does not apply to the grant of a franchise by a franchisee who is not the franchisor, its associate, or a director, officer or employee of either, who sells for its own account, who grants the whole franchise if it is a master franchise, and who does not sell by or through the franchisor. A grant includes the sale of an interest in the franchise, and that interest includes owning shares in the corporation that owns the franchise. If your resale fits the exemption, there is no section 5 duty for section 6 to measure the franchisor against. Whoever claims an exemption must prove it, and a franchisor’s right, exercisable on reasonable grounds, to approve or disapprove the grant does not by itself make it one effected by or through the franchisor. The conditions in full have their own answer.

What rescission returns, and from whom

If rescission is open, the franchisor or its associate must, within 60 days of the effective date, refund money received from or on behalf of the franchisee other than for inventory, supplies or equipment, buy back inventory, supplies and equipment the franchisee bought under the franchise agreement (inventory only if still on hand at the effective date) at the price paid, and compensate losses from acquiring, setting up and operating the franchise, less those amounts. Those duties sit with the franchisor side, and whether money paid to the departing franchisee falls within them is a question for counsel. Notice must be in writing, delivered as section 6(3) requires. For the wider picture, see when you can cancel a franchise purchase.

Other rights, and other provinces

The Act says its rights are in addition to any other right or remedy at law, and a purported waiver by a franchisee is void. Alberta, British Columbia, Manitoba, New Brunswick and Prince Edward Island also give franchisees a statutory right to rescind, on their own terms. Alberta’s section 13, for example, applies if the franchisor fails to give the disclosure document by the time section 4 requires, and allows rescission no later than 60 days after receiving the document or 2 years after the franchisee is granted the franchise, whichever occurs first, so a franchise operating outside Ontario needs its own statute read.