On most Ontario franchise resales the outgoing franchisee owes no disclosure document, because section 5(7)(a) of the Arthur Wishart Act (Franchise Disclosure), 2000 exempts a grant made by a franchisee. The exemption carries four conditions, section 12 puts the burden of proving it on whoever claims it, and a wrong answer gives the buyer two years to rescind.
Key takeaways
SECTION 01 OF 10
Selling a franchised business is not an ordinary business sale, because the Act does not distinguish a first sale from a fifth. Section 1(1) defines “grant”, in respect of a franchise, as including “the sale or disposition of the franchise or of an interest in the franchise”.
The same definition closes the obvious escape route: an interest “includes the ownership of shares in the corporation that owns the franchise”. Selling the shares of the company that holds the franchise agreement is a grant, not a transaction outside the statute.
“Franchisor” is then defined by conduct, not title — “one or more persons who grant or offer to grant a franchise”. A franchisee who grants a franchise falls inside that class, which is why the Act needed an express exemption for exactly that.
SECTION 02 OF 10
Section 5(1) requires a franchisor to provide a disclosure document, which the prospective franchisee “shall receive… not less than 14 days before the earlier of” signing the franchise agreement “or any other agreement relating to the franchise”, and paying any consideration relating to it.
Two words carry the risk. Receive runs the fortnight from arrival, not mailing; earlier means a deposit starts the clock unless it is refundable without deductions and under the cap section 7.1(1) of O. Reg. 581/00 sets at “20 per cent of the franchise fee, to a maximum of $100,000”.
Section 5(3) has sunk more disclosure than any content rule: the document “must be one document, delivered as required under subsections (1) and (2) as one document at one time”. Agreements on Monday and financials on Thursday is not late disclosure — it is not delivery.
SECTION 03 OF 10
Section 5(4) requires “all material facts, including material facts as prescribed”, prescribed financial statements and copies of every proposed agreement the buyer will sign. Section 5(6) governs the manner: everything “shall be accurately, clearly and concisely set out”.
The prescribed content in O. Reg. 581/00 points at a system’s weak spots: item 15 of section 6 demands the name and last known address of every Ontario franchisee of that type that left the system last fiscal year, and item 16, for every closure in the preceding three, “the reasons for the closure”.
Section 7(1) of the regulation requires a certificate that the document “contains no untrue information, representations or statements”, signed by two officers or directors where there is more than one. Treadstone Law’s note on the disclosure duty states it the same way, for new franchises.
SECTION 04 OF 10
Section 5(7) opens “This section does not apply to,” and clause (a) exempts “the grant of a franchise by a franchisee if,” four subclauses are satisfied. They are cumulative: one failure and all of section 5 applies.
Subclause (i) requires the franchisee “is not the franchisor, an associate of the franchisor or a director, officer or employee of the franchisor or of the franchisor’s associate”. Subclause (ii) requires the grant be “for the franchisee’s own account”, and (iii) that with a master franchise “the entire franchise is granted”.
Subclause (iv) is the one that fails in practice: “the grant of the franchise is not effected by or through the franchisor”. Treadstone Law’s note on resale exemptions is right that the question is fact-specific rather than one of general impression, though it puts the categories in the regulations when section 5(7) carries them.
SECTION 05 OF 10
A franchisor is involved in every resale, so the Act says how much involvement is survivable. Section 5(8) provides that for subclause (7)(a)(iv), “a grant is not effected by or through a franchisor merely because” one of two things is true.
The first is “a right, exercisable on reasonable grounds, to approve or disapprove the grant”. The second is a transfer fee “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”. A fee fixed in the agreement is safe at its stated figure; an improvised one is not.
Nothing else is listed, so a franchisor that markets the location, introduces the buyer or takes a success fee is doing something section 5(8) does not protect. Treadstone Law’s piece on approval and transfer fees describes the practice but never links it to section 5(8).
SECTION 06 OF 10
Clause (7)(a) exempts a grant by a franchisee and says nothing about a grant by the franchisor. On the common resale the buyer never steps into the seller’s paper: Treadstone Law’s guide to franchise transfers records that buyers are frequently required to sign the franchisor’s current-form agreement.
That signature is a grant by the franchisor to a prospective franchisee, so section 5(1) applies to the franchisor on its own timetable. Treadstone Law’s answer on resale disclosure reaches the same result: often yes, and specifically where a new or amended agreement is signed.
The seller’s exposure is indirect but real: a buyer who rescinds against the franchisor eighteen months on is unwinding a business the seller was already paid for, and will look for a second defendant.
SECTION 07 OF 10
Clause (7)(c) exempts an additional franchise only where it “is substantially the same as the existing franchise that the franchisee is operating” and “there has been no material change” since the last agreement. Clause (7)(f) exempts renewals on parallel conditions.
Clause (7)(d) exempts a grant by an executor, receiver or trustee in bankruptcy, which is why an estate sale sits differently. Clauses (g) and (h) exempt by size at both ends: sections 9(2) and 9(3) of the regulation fix the thresholds at “$15,000” and “$3,000,000” of total initial investment.
Then the provision that decides arguments. Section 12: “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 closing file silent on which exemption was relied on is not neutral; it is a defeat waiting to happen.
SECTION 08 OF 10
Two windows run on different triggers. Section 6(1) allows rescission “no later than 60 days after receiving the disclosure document” where it was late or “the contents of the disclosure document did not meet the requirements of section 5”. Section 6(2) allows it “no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document”.
Both are exercised “without penalty or obligation”, and the mechanics are prescribed: mailed notice takes effect “on the fifth day after it was mailed”, and section 13(2) of the regulation deems a couriered notice delivered “on the second day after the day of delivery by courier”.
Section 6(6) separates this from damages. Within 60 days the franchisor must refund money received, buy back inventory, supplies and equipment “at a price equal to the purchase price paid by the franchisee”, and “compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise”. Nothing there asks whether the defect caused the loss — a point Treadstone Law’s note on resale rescission stops short of.
SECTION 09 OF 10
Section 7(1) gives damages where a franchisee suffers a loss from a misrepresentation in the disclosure document, or “as a result of the franchisor’s failure to comply in any way with section 5”. Any failure, on those words, not only a material one.
The defendants reach past the franchisor: its agent; its broker, being a person “who grants, markets or otherwise offers to grant a franchise, or who arranges for the grant of a franchise”; its associate; and “every person who signed the disclosure document”, all jointly and severally liable under section 8(3).
Proof is tilted too. Section 7(2) deems a franchisee to have relied on a misrepresentation the document contained, and section 1(1) defines misrepresentation to include “an omission to state a material fact that is required to be stated”.
SECTION 10 OF 10
None of this can be contracted around. Section 11 voids any “purported waiver or release by a franchisee of a right given under this Act”, so a buyer’s acknowledgement that disclosure was not required is worth nothing if it was. Section 10 voids any clause moving jurisdiction outside Ontario; section 2(1) reaches a business “operated partly or wholly in Ontario”.
Several other provinces have their own franchise statutes, and they are not copies of each other. Ontario runs its two rescission windows independently; section 13 of Alberta’s Franchises Act, RSA 2000, c. F-23 runs them together and closes the earlier — “no later than 60 days after receiving the disclosure document, or” “no later than 2 years after the franchisee is granted the franchise,” “whichever occurs first”. Its renewal exemption carries none of Ontario’s conditions either. The others are not characterised here, because they were not read.
So settle the disclosure question in writing before the offer, and disclose where there is doubt: a needless disclosure costs a fortnight, a missing one stays live for two years. An exemption removes the statutory document, not the diligence — where Treadstone Law’s answer on what an exemption removes, its answer on selling in default, its article on the Act and resales and its resale practice page all land.
Usually not. Section 5(7)(a) of the Arthur Wishart Act exempts a grant made by a franchisee from the disclosure requirement, provided four conditions are all met, including that the grant is not effected by or through the franchisor.
Yes. That signature is a separate grant made by the franchisor, not by the selling franchisee, so the franchisee’s resale exemption does not cover it and the franchisor must provide its own disclosure document on its own 14-day timetable.
Up to two years from signing the franchise agreement, if no disclosure document was ever provided at all. Where a document was given but was late or deficient, the window is only 60 days from when the buyer received it, and the two windows run on different triggers.
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