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Q&A With Frank Zaid: Delivering disclosure documents before location is set

ShopsBy Frank Zaid
Q: Can a franchisor deliver a disclosure document to a franchisee and sign a franchise agreement before a location for the franchise has been determined?

A: Until a recent decision by the Ontario Superior Court, it was a very common practice—promoted by both franchisors and their legal advisors—for the franchise disclosure document (FDD) to be delivered to franchisees in situations where the location of the franchised business was not determined until after the franchise agreement was signed. In such situations, the FDD cannot include a copy of the head lease, of course, because it does not yet exist; and the location of the franchised business cannot be considered a material fact requiring disclosure, because it is not yet known.

The business rationale for this practice applies to both parties. The franchisor wants to secure a franchisee who is committed to search for a location in accordance with the provisions of the franchise agreement, while the franchisee wants to know he/she has secured a franchise before spending further time and money to find a location.

Despite this long-accepted practice, however, in a decision of the Ontario Superior Court on September 7, 2016, in the case of Raibex Canada against AllStar Wings & Ribs (ASWR) Franchising, the latter—a restaurant franchisor—was found liable for rescission under the province’s Arthur Wishart (Franchise Disclosure, 2000) Act for failing to disclose a copy of the head lease and location-specific development costs for the franchise, despite the fact the location was to be determined after the franchise agreement was signed, pursuant to a site selection process detailed within the franchise agreement.

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