Pursuant to section 5(4)(c) of the Arthur Wishart Act (Franchise Disclosure), 2000, S.O. 2000 c. 3 (the “Wishart Act”), the franchise disclosure document that a franchisor provides to a prospective franchisee must contain “copies of all proposed franchise agreements and other agreements relating to the franchise to be signed by the prospective franchisee”. The lease (or a sublease or agreement to assign the lease, as the case may be) for the premises from which the franchise will operate is one such agreement that needs to be included in the disclosure document.
Even if the franchisor has entered into a lease directly with the landlord and, accordingly, the prospective franchisee is only expected to sign a sublease, the franchisor should provide a copy of the head lease to the franchisee as part of the disclosure document. The reason for the foregoing is two-fold. First, a sublease often stipulates that the franchisee is to pay the franchisor the rent that the head landlord charges the franchisor under the head lease. Section 6(1) of regulation promulgated under the Wishart Act, O. Reg. 581/00 (the “Wishart Regulation”) states that the disclosure document must include an estimate of the costs for leases necessary to establish a franchise, as well as any payment to the franchisor associated with the establishment of the franchise and required by the franchise agreement. Second, section 5(4)(a) of the Wishart Act requires the franchisor to disclose “all material facts”. Lease arrangements for the franchise location are material facts.
Franchisors often erroneously believe that they do not need to disclose lease arrangements if, at the time they provide the disclosure document to a prospective franchisee, a lease for the franchise location has not yet been executed. Recently, the Ontario Superior Court of Justice addressed this issue.
In 2337310 Ontario Inc. v. 2264145 Ontario Inc., 2014 ONSC 4370, the disclosure document provided by the franchisor to the franchisee in January 2012 did not contain the head lease or the sublease as there was no lease in existence with respect to the contemplated franchise premises at that time. In March 2012, the franchisor entered into a head lease for the franchise premises with the landlord. The franchise agreement was signed on September 5, 2012. Attached to the franchise agreement was a signed sublease with respect to the premises, pursuant to which the franchisee was required to pay the rent set out in the head lease. The head lease was not attached to the franchise agreement and has never been provided to the franchisee. As a result, the franchisee claimed that the disclosure was incomplete.
The court concluded that “the proposed sublease was an ‘agreement relating to the franchise to be signed by the prospective franchisee’, and it therefore was a document that should have been included in the Disclosure [Document]. Additionally, the cost of the lease was something that had to be disclosed pursuant to s. 6.1.ii of the Wishart Regulation.” Furthermore, the court held that “it is no answer for a franchisor to explain non-compliance on the basis that a document or information did not exist or was unavailable at the time the disclosure statement was prepared.”
The court then referred to section 5(5) of the Wishart Act, which states that if any material change occurs after the disclosure document is delivered, the franchisor must provide the prospective franchisee with a written statement of the material change as soon as practicable and before the signing of the franchise agreement, or any other agreement relating to the franchise, and the payment of any consideration by the prospective franchisee. Relying on this section, the court held that when additional documents are signed or new information becomes available, the franchisor has an obligation to either provide an updated disclosure document or a written statement of material change to the franchisee. It concluded that once the head lease was signed and the form of sublease was finalized, the franchisor was required, and failed, to disclose those documents and the information they contained to the prospective franchisee.
In addition to the franchisor keeping in mind its continued disclosure obligations with respect to leases, it is recommended that, in the event of a pending head lease, the franchisor’s disclosure document include a description of the general process of the franchisor securing the head lease. Similarly, if the franchise location is unknown at the time of the disclosure, the franchisor would be wise to include a description of the general site-selection process in its disclosure document.