Projections, Agreements, Leasing & Background Info: A Disclosure Document Primer

This part of the Law Works Disclosure Document Primer Series examines the projections, all agreements, leasing information and franchisor’s background information requirements.

A franchisor doing business in Ontario is required to deliver to a prospective franchisee a fully compliant Disclosure Document under the provisions of the Arthur Wishart Act (Franchise Disclosure), 2000 and its Regulation.

An Ontario Disclosure Document must contain the information and documents as set in this “Disclosure Document Primer” series.

Projections

A franchisor is not required to provide an estimate of annual operating costs in the Disclosure Document, unless they are otherwise “material facts”.

This is different from the estimated franchisee’s costs of setting up the franchised business, which are required to be disclosed in detail. See the Law Works Franchise Justice Blog Post, dated January 15, 2014, titled “Certificate, Financial Statements and Costs: A Disclosure Document Primer”, for more information about the required disclosure relating to the costs of setting up.

If, for whatever reasons, an estimate of annual operating costs for the franchise is provided in the Disclosure Document, they are required to be accompanied in the Disclosure Document by a statement specifying (i) the basis for the estimate, (ii) the assumptions underlying the estimate, and (iii) a location where information is available for inspection that substantiates the estimate.

Similarly, a franchisor is not required to provide earning projections in the Disclosure Document.

If a franchisor chooses to provide earning projections, they are required to be accompanied in the Disclosure Document by a statement specifying similar information as with an estimate of annual operating costs: (i) the reasonable basis for the projections, (ii) the assumptions underlying the projections, and (iii) a location where information is available for inspection that substantiates the projections.

Copies of all proposed franchise agreements and other agreements

The Disclosure Document is required to include in it – as one combined document – all proposed franchise and other agreements relating to the franchise that are required to be signed by the prospective franchisee.

This includes, among other things, not only the main franchise agreement, but also the head lease and sublease agreement, as well as all security agreements, personal guarantees, etc.

Leasing Information

Relating to the previous heading with respect to all proposed franchise and related agreements, where the franchise is of a retail nature and requires the leasing of retail space, the key terms of the head lease and sublease are material facts.

These material facts, as all other material facts, are required to be contained in the Disclosure Document.

See the Law Works Franchise Justice Blog Post, dated January 15, 2014, titled “Material Facts, Material Changes and Franchisor’s Associates: A Disclosure Document Primer”, for more information about the required disclosure relating to material facts and material changes.

Prescribed Information: Background of the Franchisor and Its Officers and Directors

The Regulation to the Act prescribes a list of information that is required to be contained in the Disclosure Document.

A component of this section relates to the background of the franchisor and its officers and directors. The following is an outline of the requirements of this component:

• the business background of the franchisor;
• the business background of the directors, the general partners and the officers of the franchisor;
• a statement, including a description of details, indicating whether, during the ten years immediately preceding the date of the disclosure document, the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor has been convicted of fraud, unfair or deceptive business practices, or a violation of a law that regulates franchises or business or if there is a charge pending against the person involving such a matter;
• a statement, including a description of details, indicating whether the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor has been subject to an administrative order or penalty imposed under a law of any jurisdiction regulating franchises or business or if the person is the subject of any pending administrative actions to be heard under such a law;
• a statement, including a description of details, indicating whether the franchisor, the franchisor’s associate or a director, general partner or officer of the franchisor has been found liable in a civil action of misrepresentation, unfair or deceptive business practices or violating a law that regulates franchises or businesses, including a failure to provide proper disclosure to a franchisee, or if a civil action involving such allegations is pending against the person, and
• details of any bankruptcy or insolvency proceedings, voluntary or otherwise, any part of which took place during the six years immediately preceding the date of the disclosure document, against any of the following persons as debtors.

Failure by the franchisor to provide the required information in a Disclosure Document may entitle a franchisee to a rescission of the franchise purchase.

For an overview of the franchise rescission remedy in Ontario under the Act, see the Law Works Franchise Justice Blog Post, dated January 15, 2014, titled “Franchise Rescission in Ontario: A Primer”.

For more information, please visit Law Works’ Franchise Disclosure Documents Practice or Franchise Rescission pages.