Franchise disclosure law in Alberta

Alberta regulates franchise sales through its own Franchises Act and the Franchises Regulation made under it. Both turn on one idea: under section 4 of the Franchises Act, a franchisor must give a prospective franchisee a disclosure document at least 14 days before the earlier of that person signing any agreement relating to the franchise and paying any consideration relating to it. For someone buying a franchised business in Alberta, the practical questions are whether the Act reaches the purchase at all, whether the sale falls inside the exemption for a franchisee selling its own franchise, and what the buyer can do if a required document was missing or wrong. The Canadian Franchise Association notes that provincial franchise statutes share many elements but differ in important ones, so this guide stays with Alberta’s text.

When the Act reaches a purchase

Section 3 applies the Act to a sale of a franchise made on or after 1 November 1995 if two things are both true. The franchised business is to be operated partly or wholly in Alberta, and the purchaser is an Alberta resident or has a permanent establishment in Alberta for the purposes of the Alberta Corporate Tax Act. The second test is Alberta’s own: British Columbia’s Act ties its reach to where the business is operated or to be operated, without a purchaser-residence test. The Act defines a “sale” as a sale or disposition of a franchise or of an interest in it, and an interest includes owning shares in the corporation that owns the franchise, so a share purchase can be a sale under the Act.

What the franchisor must deliver, and by when

Under section 4, a franchisor must give every prospective franchisee a copy of its disclosure document. Under section 4(2) of the Franchises Act, the franchisee must receive it at least 14 days before the earlier of signing any agreement relating to the franchise and paying any consideration relating to it. The document must comply with the regulations, contain copies of all proposed franchise agreements, and include the financial statements and other documents the regulations require. A written description of any material change must reach the franchisee as soon as practicable and before signing or paying, whichever is earlier. Under section 4(6)–(7), a fully refundable deposit, as section 4(8) defines it, is not payment of consideration, and an agreement that contains only terms about such a deposit, keeping information confidential or designating a location or territory is not a franchise agreement for these timing rules.

The exemption for a franchisee selling its own franchise

Section 5(1)(a) exempts a sale of a franchise by a franchisee from section 4 if all four conditions are met. The seller is not the franchisor, an associate of the franchisor, or a director, officer or employee of the franchisor or its associate. The sale is for the seller’s own account. If it is a master franchise, the entire franchise is sold. And the sale is not effected by or through the franchisor. Under section 5(2), a sale is not effected by or through the franchisor merely because the franchisor has a reasonable right to approve or disapprove it, or requires a transfer fee that is either a specific amount set out in the franchise agreement or no more than its reasonable actual costs of processing the transfer. Section 19 puts the burden of proving an exemption on the person claiming it. For approval rights, see who has to approve a franchise resale.

What the regulation adds to the document

The Franchises Regulation, Alberta Regulation 240/95, says a disclosure document must contain all material facts, including those relating to the matters in its Schedule 1. That schedule asks for details about the franchisor, its associates and the directors, general partners and officers with management responsibilities relating to the franchise, including convictions, civil litigation, administrative proceedings and orders, and bankruptcy or insolvency proceedings. The document must carry a dated certificate, signed by at least two officers or directors where the franchisor has two or more, by the only one where it has one, or by the franchisor if it is not a corporation. A franchisor may use a document authorized under the franchise law of a jurisdiction outside Alberta if it adds supplementary information setting out the material changes needed to meet the Alberta requirements.

Remedies when disclosure is late, missing or wrong

Section 13 lets a prospective franchisee rescind all the franchise agreements by notice of cancellation to the franchisor or its associate if the franchisor failed to give the disclosure document by the time section 4 requires. Under section 13 of the Franchises Act, the notice must come no later than 60 days after receiving the document or no later than 2 years after the franchise is granted, whichever occurs first. Under section 14(2) of the Franchises Act, within 30 days after receiving the notice, the franchisor or associate must compensate the franchisee’s net losses in acquiring, setting up and operating the business. Section 9 separately gives a right of action for damages for a misrepresentation in a disclosure document, against the franchisor and everyone who signed it, and deems the franchisee to have relied on it. Section 10(1) is a defence if the franchisee bought with knowledge of the misrepresentation, and section 10(2)–(3) give persons other than the franchisor further defences.

Questions that follow from the Alberta text

Because the Act puts the burden of proving an exemption on whoever claims it, a buyer can ask what the claim rests on before signing. Questions that follow from the Act and regulation include these.

• Which of the four section 5(1)(a) conditions the seller says is met, and what shows that the franchisor is not effecting the sale.
• Whether the franchisor will deliver a disclosure document anyway, with its dated certificate and any statement of material change.
• Whether the purchase is of the franchise itself or of shares in the corporation that owns it, since the Act treats both as a sale.
• Whether the transfer fee in the franchise agreement is a stated amount or is described as the franchisor’s processing costs.
• Whether the franchise agreement moves disputes to a forum outside Alberta, which section 17 makes void for a claim otherwise enforceable under the Act in Alberta.