Anonymised, illustrative composite. Two of the four things this franchisor did are expressly protected by s.5(8) of the Arthur Wishart Act. The other two are what a broker does.
At a glance
A franchisee who had run a single quick-service unit in a mid-sized Ontario city for nine years decided to sell. He told his franchisor first, which is what the agreement required, and the franchisor's regional development manager said she had two approved candidates on file who were looking in that market. She introduced one of them. Over the following six weeks she attended two meetings between the parties, produced a comparison of three recent transfers in the region, and proposed $625,000 against the vendor's opening ask of $690,000. The buyer accepted that number. The franchisor then approved the transfer formally and invoiced its transfer fee of $12,500. Neither side's counsel treated a disclosure document as necessary, which is the ordinary position on a resale — see disclosure obligations on a franchise resale.
The exemption has four conditions, and three of them were plainly satisfied: the vendor was not the franchisor, an associate, or a director, officer or employee of either; the grant was for his own account; and this was not a master franchise. The fourth is the one that fails in practice. Section 5(7)(a)(iv) requires that “the grant of the franchise is not effected by or through the franchisor”.
The Act does not leave that phrase entirely at large. Section 5(8) supplies a safe harbour, and its operative word is the one everybody skips: “For the purpose of subclause (7) (a) (iv), a grant is not effected by or through a franchisor merely because, (a) the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove the grant; or (b) a transfer fee must be paid to the franchisor in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs incurred by the franchisor to process the grant.”
Two things are named and both were present. Approval on reasonable grounds: yes. A transfer fee set out in the agreement: arguably yes, and that limb is examined below. What is not named is sourcing the buyer out of the franchisor's own candidate register, and what is not named is a franchisor representative negotiating the price. Section 5(8) is not a list of examples of conduct that is acceptable; it is a statement that those two things, by themselves, do not take a grant outside the exemption. A franchisor that also brokers the introduction and moves the number is doing something the safe harbour says nothing about.
And it is the vendor's problem to prove otherwise. Section 12 provides that “In any proceeding under this Act, the burden of proving an exemption or an exclusion from a requirement or provision is on the person claiming it.” A vendor relying on s.5(7)(a) is not defending an allegation; it is carrying the case.
The transfer fee is worth working through because it is the limb most files get wrong. The agreement fixed the fee as the greater of $10,000 and 2% of the gross sale price, which on $625,000 produced $12,500. Section 5(8)(b) offers two independent routes: an amount set out in the franchise agreement, or an amount not exceeding the franchisor's reasonable actual processing costs. Asked for the second, the franchisor produced a figure of about $2,800, so on that route the fee was over by $9,700. The vendor was therefore relying entirely on the first route, and whether a formula is an amount “set out in” an agreement is an open question.
The exposure it was protecting against was not the fee. Where no disclosure document is provided at all, s.6(2) gives the franchisee a right to rescind “no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document”. The buyer's projected cost base at the two-year mark — the $625,000 price, $46,000 of refit the franchisor required within twelve months, and $41,000 of first-year losses through the transition — came to about $712,000. That is the order of magnitude the vendor was carrying to save nineteen days.
The decisive point is a definitional one that resale vendors routinely miss: on a resale the vendor is a franchisor for that grant. The Act defines a franchisor as “one or more persons who grant or offer to grant a franchise”, and s.5(7)(a) confirms the point by exempting “the grant of a franchise by a franchisee” — there would be nothing to exempt if that grant were not otherwise caught. So if the exemption is unavailable, the disclosure duty in s.5(1) and the rescission obligations in s.6(6) attach to the selling franchisee, not to the brand.
That is why the exemption exists and also why losing it is so awkward. A disclosure document must contain, among other things, financial statements as prescribed — the franchisor's, not the franchisee's. A selling franchisee that has lost the exemption owes an obligation it cannot discharge on its own. It has no access to the audited statements, no ability to certify the material facts about a system it does not control, and no way to cure the defect without the cooperation of the party whose conduct caused it.
The buyer's counsel found it in the email chain: the first contact between the parties was a franchisor introduction, and the price comparison had come from the franchisor on franchisor letterhead. Rather than argue about whether that took the grant outside s.5(7)(a), the parties went to the franchisor and asked it to deliver a disclosure document. It did — it produces them for new grants anyway — and delivery started the fourteen-day period in s.5(1). Closing moved nineteen days.
The live risk was not litigation. It was the next sale. A unit whose own acquisition sits on a contested exemption is a unit whose next buyer finds a two-year rescission window that may or may not have expired and a grant nobody can prove was exempt. Nineteen days and a $12,500 fee bought a clean answer to a question that would otherwise have been asked at every subsequent closing.
Across the border in Alberta the same fee would have been a harder problem. Section 5(2) of Alberta's Franchises Act protects a transfer fee “the specific amount of which is established in the franchise agreement”, or one not exceeding reasonable actual processing costs. Ontario says “in an amount set out in the franchise agreement”; Alberta says the specific amount must be established in it. A formula that produces a different number on every sale can be argued into the Ontario wording. It is a poor fit for Alberta's.
The tell was who sent the first email. On a genuine franchisee-to-franchisee resale the parties find each other — through a broker, a listing, a competitor, a family connection — and the franchisor appears later, to approve. When the introduction itself comes from the franchisor's development team, the transaction has been effected through the franchisor in the ordinary meaning of those words, whatever the paperwork says afterwards.
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