July 24, 2020
Taking Advantage of Upcoming Amendments to Ontario's Franchise Act
by Clark Harrop, Partner and Christian Hodge, Summer Student
Effective September 1, 2020, franchisors in Ontario will be able to take advantage of recently announced amendments to Ontario's law governing franchises (the Arthur Wishart Act (Franchise Disclosure), 2000) ("Ontario's Act") and its regulations.
The key changes to Ontario's Act are:
It was previously a commonly held view that franchisors in Ontario were unable to have prospective franchisees sign simple confidentiality agreements in advance of delivering a franchise disclosure document and waiting for the 14-day cooling-off period to expire. This was because Ontario's Act contains a broad definition of "franchise agreement" that could have applied even to simple confidentiality agreement. The franchise disclosure document itself typically contains confidential information and this led to the illogical result that franchisors had to disclose the confidential information found in the franchise disclosure document before they could ask a prospective franchisee to sign a confidentiality agreement.
In this respect, Ontario's Act was an outlier as the franchise acts in British Columbia, Alberta, New Brunswick and Prince Edward Island all permit parties to sign basic confidentiality agreements in advance of the franchisor delivering its franchise disclosure document.
This has now been remedied and Ontario's Act will permit franchisors and prospective franchisees to sign confidentiality agreements in advance of the franchisor delivering a franchise disclosure document and waiting for the 14-day cooling-off period to expire.
Unlike British Columbia, Alberta and Manitoba, Ontario previously did not permit franchisors to collect refundable deposits in advance of delivering the franchise disclosure document and waiting for the 14-day cooling-off period to expire.
Franchisors will now be permitted to collect refundable deposits of up to 20% of the franchise fee, to a maximum of $100,000.
The regulations previously required audited or review engagement financial statements prepared in accordance with Canadian GAAP (and corresponding auditing standards) or those that are "at least equivalent". The new amendments have expanded this requirement, and now permit the use of financial statements prepared in accordance with U.S. GAAP and the corresponding auditing standards. This welcomed change will make disclosure easier for U.S.-based franchisors who wish to enter the Ontario franchise market and for those already operating in Ontario. It should be noted, however, that the requirements for financial statements in other disclosure provinces (particularly Manitoba) have not changed, so U.S.-based franchisors who intend to franchise nationally in Canada may not see a change in how they approach disclosure of financial statements. U.S.-based franchisors who are new to the Canadian market and commencing their Canadian franchising efforts in Ontario will certainly benefit from this change.
Ontario's Act has, since its inception, included a number of exemptions from a franchisor's obligation to provide a franchise disclosure document. Two of these exemptions related to the size of the franchisee's investment, including the "minimum investment exemption" for franchises in which the franchisee's total investment was less than $5,000, and the "large investment exemption" for franchises in which the franchisee's investment in the first year of operations was greater than $5,000,000.
The effect of the new amendments is to modify both the thresholds and the method of calculating the franchisee's total initial investment to give both exemptions a broader application. Now, the minimum investment exemption threshold has been raised to $15,000 and the large investment exemption threshold has been lowered to $3,000,000.
The definition of the large investment threshold will now be based on the same definition of "initial investment" that is used to determine the minimum investment threshold. For purposes of determining whether the minimum investment exemption or large investment exemption is available, the initial investment is now calculated by factoring in the actual amounts that the franchisee has paid (or will pay) to establish or acquire the franchise and by considering the estimated amounts that the franchisee expects to pay to establish or acquire the franchise. This is an important change as it now allows franchisors and prospective franchisees to determine whether either exemption will apply in advance of the execution of the franchise agreement or the payment of any funds to the franchisor.
Most franchisors will be familiar with the obligation to provide additional disclosure following the delivery of a franchise disclosure document if new material facts come to light before the prospective franchisee signs the franchise agreement. The disclosure of these new material facts is typically accomplished through a statement of material change.
Following the amendments, Ontario's Act will prescribe the contents of the statement of material change, but will not prescribe a specific form for the statement of material change. This approach is similar to that taken by British Columbia.
The approach taken by Ontario to prescribe the content of the statement of material change, rather than to prescribe a standard form, is a positive step forward from an industry perspective. The benefits are two-fold: not only will this approach encourage the development of multi-jurisdictional forms of statements of material change among franchisors, but it will also reduce the tedium of dealing with multiple prescribed standard forms with only minor differences across provincial jurisdictions.
What can franchisors do to prepare for these upcoming changes to Ontario's Act?