The Ontario Superior Court recently found franchisee Raibex Canada in Mississauga, Ont., was entitled to rescind its franchise agreement with All Star Wings and Ribs (ASWR) because the franchise location and the head lease were not established before the disclosure document was provided.
In September 2012, ASWR provided a franchise disclosure document to Raibex for a restaurant without a set location or a head lease. It did, however, include a draft sublease requiring the franchisee to accept all terms, covenants and conditions in the head lease negotiated by the franchisor and the landlord.
The franchise agreement was executed in November 2012 and the location was determined in June 2013. The head lease included a term requiring prepayment for five months’ rent to be released one month per year for the first five years. With a security deposit, the cost to the franchisee totalled $120,000.
The ASWR franchise opened in March 2014 and ASWR invoiced Raibex for the prepayment amount and outstanding construction costs. The franchisee refused to pay and, in July 2014, served a notice of rescission of the franchise agreement, claiming ASWR’s disclosure was deficient. The franchisor argued it was impossible to disclose a head lease that did not yet exist.
Laura Bevan of Lawson Lundell LLP says franchisors often do not want to take on the obligations of a head lease without having a franchisee lined up. She says it is common practice in Canada to enter a franchise agreement before determining the location of the business. The franchisor and franchisee typically agree the franchisor will use his/her “best efforts” to find a suitable location and franchisees often offer input. Once a location is determined, it is common for the franchisor to enter a head lease for the premises and then sublease it to the franchisee, which provides the ability for the franchisor to step in to take over the business if necessary.
The court said ASWR failed to meet the disclosure requirements in the Arthur Wishart (Franchise Disclosure, 2000) Act because the location of the business and the terms of the head lease were not known and therefore could not be disclosed. For this reason, Raibex was entitled to rescind. The court stated franchisors must wait to provide disclosure until material facts are known.
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